Target date funds should be used with caution. Because of the wide variety of methods the plan sponsor must perform thorough due diligence to protect plan participants and themselves. Many are off target.

The lack of a consistent approach among managers also makes it difficult for plan sponsors — or advisers working on their behalf — to evaluate target date providers, leaving many wondering how best to select a target date suite that meets the unique needs and characteristics of their participant base.For plans looking for an off-the-shelf target date product suited to their participants, the due-diligence process must go beyond traditional performance-based measures such as relative benchmark performance and peer group rankings to incorporate a thorough analysis of the differences in product design and features.

Target date funds can become a hiding place for new money managers and poorly performing funds. Additionally, each participant has different needs and tolerances regardless of age. Given the importance of the retirement plan, plan sponsors should investigate using professionally managed risk adjusted globally diversified portfolios for their plan.

Please comment or call to discuss your alternatives and what is best for your company.

Variable annuities are another way for insurance companies to hide unnecessary fees from plan participants. Many of the features when viewed over the long term are unnecessary and hurt performance. The complexity in these annuities does nothing but confuse plan participants and are might to feed their fear. In other words they help sell more insurance.

Annuities can make sense for a part of your portfolio especially as you reach retirement and you are looking for some stability to your income stream, but not in your 401(k).  The costs and issues in managing a 401(k) plan in your employees’ best interest far outweigh the need for providing annuities in any company’s retirement plan.

When you consider all the fees involved in any annuity the benefit to the investor is very small and in most cases will result in a smaller account balance. Annuities are sold based on the fear of the client. Agents and brokers make money on commissions and will sell whatever the client wants at the time. An real investment adviser is not merely a salesperson. Sometimes being in the correct investments is uncomfortable but is the best for the client.

Please comment or call to discuss how this affects you and your company.

There are really only three simple rules to sinvesting successfully..own equities….globally diversify….rebalance. Looking at past performance to determine the best performers and looking for them to repeat is a futile exercise.

Past Performance is no… (You know the rest)Will Danoff, who managed the Fidelity Contrafund, was Domestic Equity Manager of the Year in 2007. In that year, he beat his benchmark by almost eight percent. In 2009, he underperformed his benchmark by almost the same percentage.

Mason Hawkins, who managed Longleaf Partners, won the award in 2006, when he beat his benchmark by 6.17 percent. He underperformed his benchmark by 6.22 percent in 2007 and by 13 percent in 2008.

Every one of the fund managers of the year had subsequent years of some underperformance. Perhaps the worst example is Jim Callinan, the manager of the RS Small Cap Growth fund, who was the 1999 Domestic Equity Manager of the Year. No wonder. His fund beat its benchmark by an unbelievable 140 percent! Then Jim fell off the wagon. In six of the seven ensuing years, he underperformed his benchmark. In the only year he beat it (2004), it was by a measly 0.85 percent.

The Lack of Evidence of Skill

Of the sixteen funds studied, only one fund manager evidenced skill based on a statistical test (the t-test) which determines if the fund’s outperformance was really attributable to skill (with a 95 percent or higher probability) or if it could be explained by luck. Even if you can find a fund manager who passes the test for a finite period of time, it is not a slam dunk that his skill will persist in the future.

Helpful Data from Morningstar

While Morningstar’s “Fund Manager of the Year” awards are likely to mislead investors, other data it provides is worthy of serious consideration. It reported 2011 inflows of passively managed long-term funds of $76.4 billion in 2011. In sharp contrast, actively managed funds had net outflows of $9.4 billion. Clearly, investors are getting the message. Still, the overall market share of actively managed funds, as reported by Morningstar, is 85.2 percent compared to 14.8 percent.

Plan participants need to understand the value of the fund managers in your plan. In a vast majority of cases these actively managed funds add no value. There is evidence that asset allocation is the main determinant of portfolio success.

Please comment or call to discuss how this affects you and your organization.

The new fee disclosure regulations will force plan sponsors to deal with the quality of retirement plan they offer their employees. These new disclosures will help plan participants improve results by reducing expenses. Just a small decrease in expenses will mean a more successful retirement outcome for plan participants.

The final rule regarding this provision is more strict than the earlier versions, says attorney Fred Reish, an attorney with Drinker Biddle & Reath LLP. He points out that the wording in previous versions of the rule was more relaxed stating that employers could fire their advisors.Now, it’s a requirement and the employers must also notify the labor department.

“Before, the statement said that you should consider firing the provider but now they changed it and it’s very clear that it’s mandated that you must fire the provider,” he says.

While the language of the DOL refers to “covered service providers,” Reish says there’s no doubt that “covered service providers” include RIAs as well as providers and other types of advisors.

How big a deal?

While this provision may cause some advisors to worry, top advisors have already been doing this for eons, Alfred says. “The best independent advisors operating in the retirement space have been fully disclosing all of their fees for years. So, this rule is unlikely to even get their attention.”

Rick Meigs: I believe it [this
new provision] is not well known
to advisors.

But given that many small companies are overwhelmed by day-to-day concerns, giving their 401(k) plan fees more scrutiny will likely be placed on the back-burner, says Phil Chiricotti, president of 401(k) organization the Center for Due Diligence.

He predicts that employers don’t want to be charged with these types of tasks.

“Small-plan sponsors are going to outsource the disclosure work, or work with someone who can do it for them or terminate their plans,” he says. “They are not going to spend every moment on their retirement plans when they can hardly keep their box company, window company or whatever they make open. The burden on small plan sponsors is almost insurmountable.” See: Phil Chiricotti speaks out on broker-sold commissions, RIA fees and heresy.

Small business owners should begin to look for outsourcing opportunities with the fiduciary responsibilities mounting. The new fee disclosure regulations are just the beginning. This will only force plan sponsors to offer a better retirement solution to their employees.

Please comment or call to discuss how this affect your company.

Improving the quality of retirement plans to their employees can reduce anxiety and improve results. This employee benefit is becoming more and more important as the number of defined benefit plans decrease. Just today GM announced it would freeze pension benefits for their salaried staff.

Look to pay 1% or less for all-in participant feesSmall and mid-size businesses have historically been subjected to the most confusing and, unbeknownst to most, the highest-cost plans.  Many providers have designed their plans so that employers pay a small administration fee while their employees pay large participant fees that go well beyond general fund expenses and typical asset management and recordkeeping services.   They often include extra loads, wrap fees, 12b-1 fees, and often consist of high expense actively-managed mutual funds or even annuities versus lower expense equivalent fund options.  This can mean employees are paying two or even three percent in all-in fees – an amount that’s two to three times more than an appropriately priced plan.

All-in participant fees including fund expenses should come in at one percent or less.  Just paying one percent more in fees can cost employees tens if not hundreds of thousands of dollars in retirement savings over their career.

Plan sponsors will realize added responsibility when the new fee disclosure rules become effective later this year. Many employees will begin asking why they are paying such high fees. This will result in greater scrutiny and should help plan sponsors provide a true employee benefit.

Please comment or call to discuss how this affects you and your company.

The cash balance plan design can allow small business owners and professional service firms to take significant tax deductions to a qualified retirement plan. Provisions in the Pension Protection Act of 2006 clearly allow the cash balance plan to work for many successful business owners and professionals. Statistics show many successful baby boomers have not set enough aside for retirement and this plan design allows them to catch up while providing an employee benefit which will attract and retain top talent.

Cash balance defined benefit plans are offered by many large employers; according to a recent survey by Towers Watson, 25 percent of the Fortune 100 offer these retirement plans to their employees. A cash balance plan is a hybrid retirement plan that shares some features of both a traditional pension plan and a 401(k) plan.
Here’s how they work:- Like a 401(k) plan, your benefit is an account that grows with contribution and interest credits. Usually you can take the full amount in your account with you when you terminate or retire.

- Like a pension plan, your employer takes any investment risk; before you retire, your account always earns the interest crediting rate that’s specified in the plan, even if the assets in the pension trust tank due to a market downturn.

- As with a pension plan, at retirement, you have the option to have the plan pay you a monthly retirement income — a.k.a. an annuity — for the rest of your life, or take the money and roll it over to another type of income-generating account.

So when you retire, should you take your account and roll it over to another type of account that could generate a monthly income for you, such as an IRA or annuity, or should you elect to have the plan pay you the monthly annuity? One way to come up with the best answer to this question is to compare the monthly income you would get from your employer’s cash balance plan to the annuity income you’d get if you took the lump sum payout and bought an annuity from an insurance company.

The cash balance plan is an excellent plan design for many closely held businesses and professional service firms. This is not appropriate for all companies but when it works it is a very attractive benefit to attract and retain top talent.

Please comment or call to discuss how this plan design might work for your company.

There is a saying about retirement plans and portfolios in general…’Your portfolio is like a bar of soap the more you touch it the smaller it gets.’ When a 401(k) offers a more pension fund like plan their employees will benefit from less anxiety and better results.

Nearly a quarter of 401(k) savers allowed to take loans do so at any given time, according to one recent study— and over a seven-year period that rate increases to 50%. “It’s clear that in the conflict between the present and the future, the present tends to win,” Kahnemansays. “The ease with which the 401(k) savings can be withdrawn when a financial emergency arises is clearly disastrous for people. Given the choice between cashing out your 401(k) and borrowing from relatives, most feel an obligation to go with the 401(k).”As a general rule, investors would be better off with their hands tied and eyes close, he says. “With respect to my own investment policy, I have a very simple rule: don’t look,” he says. “I don’t look how well my investments are doing so I am not tempted to make quick decisions about it.” Freedom, he contends, can be overrated.

Kahneman’s work in behavioral economics highlighted our tendency to stumble when numbers are involved. The interplay between our automatic thinking and our more reflective analysis, causes us to stumble on statistics and all too often make the wrong call.

Our aversion to loss is a far more powerful force in decision making than the desire to gain, Kahneman stresses. So when decisions do need to be made, they shouldn’t be made quickly. “When it’s important, slow down. Take as much time as possible, pre-commit to a plan and stick with it.”

This is really the main reason Americans do not save enough. When you add a risk adjusted globally diversified portfolio you have an unbeatable combination.

Please comment or call to discuss how your company plan can be designed to improve results for all.

The new regulations regarding ERISA covered retirement plans including 401(k) plans will change the way plans are sold and used. These regulatory changes will continue as the retirement crisis becomes more public knowledge. Plan sponsors will be best served by hiring a professional fiduciary to manage their company plan. This will result in less risk for the plan sponsor and an excellent retire

ment vehicle for thier employees.

The safest policy 401(k) plan sponsors can adopt right now is to avoid the three biggest investment conflicts of interest: 12b-1 fees, revenue sharing, and the little-known but perhaps most deadly issue, directed brokerage.Each creates a self-dealing conflict of interest normally considered a prohibited transaction under the fiduciary standard. Over the years, however, the DOL has carved out exemptions which allow what for centuries was forbidden under trust law (which has been the basis for defining fiduciary duties)

Plan sponsors are going to learn very quickly that they cannot allow their plan participants to pay for the administrative fees of their 401(k) plan. This benefit is vital to the successful retirement of their employees and the employer needs to pay these fees as a benefit to their employees.

Please comment or call to discuss how this affects you and your company.