401(k) Fee Disclosures May Fall Short

Even if plan participants read the vast amount of details plan providers have published on fees they will continue to be underserved. Most plans provide a high number of fund choices with little direction and guidance. 401(k) plans need to be designed to look more like a pension plan to be effective in reaching their goal fo a successful retirement.

English: Graph showing amounts of pension capi...
English: Graph showing amounts of pension capital (investments of pension funds + investment by insurance companies on behalf of pension schemes) in a number of European countries. Graph shows amount of money a a percentage of GDP. Source: De Nederlandsche Bank NV, Kwartaalbericht juni 2008 p. 34/Dutch Central bank, Quarterly Bulletin June 2008, page 34. If you would like to have this graph with a caption in another language, please let me know. Used on Pensioenfonds. (Photo credit: Wikipedia)

Arranging the right mix of investments in the right amount and adjusting for your personal risk tolerance requires basic knowledge of modern portfolio theory — a set of market maxims and principles that must be carefully applied. And to get the best results, the investments that you buy as a result must be carefully monitored and tweaked, or fundamentally shifted, as you go along.Ask the advisor about the calculation for your retirement resources. Basically, here’s how that works: If you invest x amount a year for x number of years and receive an average return of x and inflation is x, then as of x date you’ll likely have about x dollars a year that you can take out of your investment accounts.

How much money you’ll have and need henceforth depends on a number of market and personal factors, including how long you’ll live. Look at your current plan contributions to see whether you’re on track. Chances are, you’re not. This calculation is no easy business, but with the right advice, you can make a stab at it.

Plan sponsors need to require their plan adviser to educate their employees individually or in groups. The 401(k) plan must become more of a pension fund like plan in order for employees to succeed in reaching their retirement goals.

Please comment or call to discuss how this affects you and your 401(k) plan.

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Retirement plan shift is creating a generation of workers unable to retire

President George W. Bush signs into law H.R. 4...
President George W. Bush signs into law H.R. 4, the Pension Protection Act of 2006, Thursday, Aug. 17, 2006. Joining him onstage in the Eisenhower Executive Office Building are, from left: Secretary of Labor Elaine Chao; Rep. Buck McKeon of California; Rep. John Boehner of Ohio; Senator Blanche Lincoln, D-Ark.; Senator Michael Enzi, R-Wyo., and Rep. Bill Thomas of California. (Photo credit: Wikipedia)

The provisions in the Pension Protection Act of 2006 allows plan sponsors to provide a more pension fund like plan for their employees. Auto-enrollment and auto-escalation are tools to help employees successfuloly retire. Atomatically enrolling employees into an age appropriate portfolio will reduce employee anxiety and improve results.

“The ongoing shift from [defined benefit] to [defined contribution] plans due to cost and cost volatility is helping to create a next generation of retirement-age workers who may not be able to afford to retire when they would ideally like to,” said Towers Watson consultant Kevin Wagner in a statement.As a result, older workers are delaying retirement, potentially clogging up promotional opportunities for younger workers and helping keep unemployment levels high for the younger generation. And this next generation is beginning to learn from the unfortunate circumstances of the current generation of retirement age workers.

“Interestingly, as this shift in retirement plans continues, other Towers Watson research shows that younger workers are finding DB and hybrid plans more appealing than DC plans,” said Alan Glickstein, another retirement consultant at Towers Watson.

The bottom line is that workers of all ages need to start expressing preferences for retirement plans that will enable some level of financial security in their retirement years. Such options include sponsoring traditional pension plans; sponsoring hybrid plans that offer the potential for lifetime retirement income; adequately funding DC plans; and providing retirement income options in DC plans. And there are good business reasons for employers to step up to the plate to help insure the retirement security of their workers.

We can no longer afford to ignore the long-term consequences of short-term thinking about our retirement programs. But we don’t need to look to our federal government to solve these problems. Employees and their employers can work together to make it a priority.

Now is the time for employees to save for retirement. If you even delay for a short time your retirement may never arrive.

Please comment or call to discuss how your company retirement can be improved to guide employees.

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Is There a “Mini-Me” ERISA Section 3(38) Investment Manager?

401(k) plan providers are excellent marketers. They will use the ERISA 3(38) Investment Manager provision to sell more plans. Unfortunately for plan sponsors and participants the devil is in the details. In most cases most of this is marketing hype and they have no intention of assuming this liability.

English: Metropolitan Life Bldg., Manhattan, N...
English: Metropolitan Life Bldg., Manhattan, New York City, in 1911. (Photo credit: Wikipedia)

Certain providers also assert that they can be a 3(38) fiduciary at the level of a plan’s trading platform. In this kind of arrangement, it’s typical, for example, that a registered investment company (RIA) or a trust company offers 3(38) investment manager services to a plan sponsor via a tri-party agreement among the RIA/trust company, the plan sponsor, and the plan’s record-keeper. At the platform level, the plan sponsor agrees to use the services of a 3(38) to prescreen and assess the investment universe, sharply narrowing the list of prudent investment options to be made available to the plan. However, a 3(38) at the platform level doesn’t select the investment options that will actually appear on the plan’s investment menu. That duty is still left to the plan sponsor (or possibly another ERISA 3(38) that’s charged specifically with selecting, monitoring, and replacing the investment options on the plan menu). Many major record-keepers provide this kind of arrangement.But such providers ordinarily would not agree to be a 3(38) investment manager at the plan level (although some of these providers do carry out the discretionary selection/monitoring/replacing duties concerning the specific investment options on a plan’s investment menu). They assert in their agreements with plan sponsors that the sponsors retain the ultimate fiduciary responsibility to determine what particular investment options will actually be offered on a plan’s investment menu. As such, the sponsor would retain fiduciary responsibility (and liability) for the selection, monitoring, and replacement of the plan’s investment options. For example, if a plan sponsor placed an S&P 500 Index fund and a money market fund on the platform, a provider such as a trust company would retain fiduciary responsibility for the underlying holdings in the S&P 500 fund, but it wouldn’t be responsible for, say, the failure of the plan sponsor to provide sufficient investment options to permit participants to create a diversified portfolio.

Be careful what you ask for, you might get it. Many selling retirement plans will tell you what you want to hear. In most cases the devil is in the details.

Please comment or call to discuss what is really in your 401(k) plan contract.

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Should the 401(k) Be Reformed or Replaced?

The 401(k) plan will work if employers take a more active role in helping their employees reach a successful retirement. The Pension Protection Act of 2006 provides the rules to accomplish just that.

US Labor Force Participation Rate
US Labor Force Participation Rate (Photo credit: Wikipedia)

David John, a pension expert at the conservative Heritage Foundation, dismisses the likelihood of enacting far-reaching changes like those supported by Senator Harkin and Ms. Ghilarducci. Partly because of industry opposition, he said, “starting something wholly new would be virtually impossible.”

Mr. John argued that it would be wise to keep the 401(k) system, imperfect as it is, and improve it. With some reservations, he praised the automatic enrollment features of the Pension Protection Act of 2006, which allows companies that offer plans to automatically enroll new employees,, typically at 3 percent of pay, although workers can opt out.

He also praised the law’s automatic escalation provisions, which enable companies to ratchet up employees’ contribution rate from 3 percent in an employee’s first few years unless workers opted out. He criticized Congress for essentially setting 3 percent of pay as a default investment level. “The 3 percent level is a huge mistake,” he said.

He wants Congress to raise the automatic enrollment’s default participation rate to 6 percent. That, he said, would hardly reduce enrollment and would create a larger nest egg for retirement.

The battle over whether the 401(k) system needs some fine-tuning or radical surgery is still gathering force. “A czar would be able to fix this easily,” Mr. Bogle said. “Whether politicians can fix this is something else again.”

The 401(k) can be saved simply by treating it more like a pension fund rather than a trading platform. Most participants are ill-prepared to effectively manage their own retirement plan.

Please comment or call to discuss.

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Are Retirement Plans Sold Backward?

The 401(k) plan was first introduced in 1981 as a supplement to a defined benefit (pension) plan by a bank seeking additional retirement funds for executives. It has been sold to companies, as a supplement, since then.

Pension (Photo credit: Frederik Seidelin)

The 401(k) plan as well as all qualified plans, ie, IRAs, Simple IRAs, SEPs, Roth IRAs  are sold by offering list of top performing mutual funds and requires the investor to choose the right mix This is a huge mistake because it utilizes the three elements that turn investing into gambling and speculating.

The elements of gambling and speculating are stock picking, market timing and track record investing.

Research has proven that investors, with and without brokers/agents, underperform the benchmark indices by a significant amount. Additional research proves that a vast majority of actively managed mutual underperform.

For these reasons I believe qualified retirement plans are being sold backwards. It is a mistake to offer a huge amount of fund choices and expect investors to make the right decisions. It is important to understand that providing too many choices results in poor outcomes..

Since most stockbrokers and insurance agents do not act as fiduciaries to their customers they have a vested interest in keeping money on the move. These Wall Street bullies make money whenever their customers trade from one strategy or asset class to another.

It’s important to remember that investors do not have to know everything about investing but they do need to know the right things.

These qualified retirement plans should be invested like a pension fund.  The pension funds goal is to have sufficient money to fund your retirement. Their strategy is to control risk, so as you age, the risk of your portfolio is reduced.

There is scientific and academic based research to develop appropriate portfolios. Utilizing this free market strategy, anxiety and worry are dramatically reduced.

When investors take a more long term view of their investments the result will be improved performance with less anxiety. When uncertainty is reduced investors will save more and enjoy life.

There are three simple rules of investing….own equities…..globally diversify…..rebalance.

This message is redundant however, so very important. Following these simple rules will lead to success long term. However, the greatest challenge investors’ face is controlling their own emotions. This requires the assistance of an objective advisor or coach. A fiduciary adviser if you will.

Making emotional decisions in your retirement account(s) is the most destructive trait of most Americans.

When plan sponsors provide a pension fund like plan everyone wins.

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Take the choice away, increase the success

When plan sponsors provide pension fund like plan their employees will save more with less anxiety. It’s time to stop gambling and speculating in the 401(k) plan. Without a prudent strategy plan participants are sure to end up with less than required for retirement. This woudl result in a win-win.

Auto-enrolment and auto-escalation. Get people involved as soon as possible and, like it or not, make the choice to participate not so much a choice as a more a chance to opt out if they really genuinely don’t want to have any retirement savings at all.

The plan proposed the most complex highway interchange attempted in Ontario to that point. (Photo credit: Wikipedia)

By turning it into an automatic routine and not a thick pile of investment prospectuses and fee disclosure information and projected outcomes and disclaimers to be handled by individuals with no financial management skills whatsoever, you might be doing participants a favor.

Then, by cranking up the knob on the auto-escalation machine, those deferrals can go from a little to quite a bit, but the participants’ pain level will hardly be affected. They may not even notice. And they will thank you in the very long run.

Plan sponsors can turn their 401(k) plan into a pension fund like plan with these auto features.

Please comment or call to discuss how you can help your employees to a successful retirement.

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Cash-back reward 401(k) system builds retirement savings

English: Employees Retirement System of Texas
English: Employees Retirement System of Texas (Photo credit: Wikipedia)

There needs to be a way to incentivize employees to save more for retirement. This option may help them save while doing the thing they love most, spending. There needs to be more and more automatic features in the 401(k) plan platform for it to succeed. Plan sponsors should investigate this and other options to promote saving.

Under the SaverNation plan, employees would be able to get retirement savings cash back on purchases made at more than 500 merchants’ websites.Participants could take part by logging onto a centralized SaverNation website and making the purchases, which would then pass from 1 percent to 25 percent of the cost back into their retirement account. Multiple or repeat purchases would only end up feeding more cash into their accounts.

The system is already being used by investment managers across the country, who’ve been able to use the simple nature and easy logic of SaverNation’s retirement savings benefits to offer as an add-on to employee systems.

“Here’s an easy way for employers to improve their employees’ financial lives,” said ERISA attorney Ary Rosenbaum, who’s included the system as an automatic feature of the open MEPs he’s been sponsoring in Florida.

“It also offers real value to sponsors. For example, encouraging the rank and file to get in the habit of saving while they spend can directly lead to higher annual contribution limits for highly compensated employees in plans failing testing.”

This is a great option for plan sponsors to encourage their employees to save for retirement. It is worth investigating for all plan sponsors.

Please comment or call to discuss how this might work at your company.

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How To Fix Your Lousy 401(k) Retirement Plan: Pool It, Like a Pension Fund

I agree with the basic premise of this approach. However, I believe there is an alternative approach. to improving your plan and turing it into a pension fund ‘like’ plan without all the concerns of this approach. Most if not all investors are incapable of doing what needs to be done when it comes to successful investing.

President George W. Bush signs into law H.R. 4...
President George W. Bush signs into law H.R. 4, the Pension Protection Act of 2006, Thursday, Aug. 17, 2006. Joining him onstage in the Eisenhower Executive Office Building are, from left: Secretary of Labor Elaine Chao; Rep. Buck McKeon of California; Rep. John Boehner of Ohio; Senator Blanche Lincoln, D-Ark.; Senator Michael Enzi, R-Wyo., and Rep. Bill Thomas of California. (Photo credit: Wikipedia)

I’m not one who’ll argue that the average investment professional can beat the stock market indexes. But a seasoned professional can excel by reducing the fees that many mutual funds charge and making sensible choices on how to allocate your employees’ retirement dollars in a constantly changing economic climate.Let’s start with those fees. The Center for Retirement Research studied the costs that afflict a typical self-directed 401(k) plan. Administrating the plan normally costs 0.1 to 0.2 percent of assets—peanuts. The heftier charge is the 1.3-1.5 percent whack for managing the investments.

Half of that 1.3-1.5 percent cost is disclosed by the portfolio managers who operate your mutual funds. You know them as the funds’ “expense ratios,” which include the 12b-1 fees that pay for the marketing and selling of the funds as well as communications with shareholders. But the other half, the researchers explained, are trading costs—bid-ask spreads and commissions paid to market makers and dealers. Neither of these trading costs are disclosed. They’re excised from a mutual fund’s profits by the traders who fulfill the fund’s buy and sell orders.

In the hands of a good investment pro, the trading costs and management fees should be significantly less. For one thing, if all your employees’ retirement funds are pooled into a single large account, the manager will be able to use exchange-traded funds or directly invest in stocks, bonds and real estate investment trusts. These alternatives can have lower trading costs, avoiding the expenses mutual funds incur by having to be constantly ready to sell investments and provide a lot of liquidity to nervous, impatient retail investors.

There is an alternative to the pooled 401(k) plan which reduces the concerns stated in this article. The Pension Protection Act of 2006 allows plan sponsors to automatically enroll employees in an age appropriate portfolio. The employee has the option of signing a simple agreement and choose their own fund mix.

Please comment or call to discuss how this affects you and your company 401(k) plan.

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Flawed 401(k) Plan Structures to Blame for Systemic Failure

The 401(k) plan has been sold backwards since the beginning in the early 1980s. Since it is the sole source of retirement for most Americans is should be sold more like a pension plan. Most Americans do not know how nor do they wish to pick their own fund mix. There also is the matter of making emotional decisions with their plan assets. Their choices should be limited to approving the risk level.

Employee of the Month Reserved Parking Sign
Employee of the Month Reserved Parking Sign (Photo credits: myparkingsign.com)

“Captured” plans: Over 90% of 401(k) plans involve the employer effectively “outsourcing” the entire administration and management of the plan. Financial vendors shape the investment program, including the mutual fund investment options to be offered, and divvy-up between themselves the compensation to be derived from the plan’s assets—all this with only superficial or illusory input from sponsors. Sponsors are permitted to choose Coke or Pepsi—i.e., any carbonated beverage (actively managed mutual fund) loaded with caffeine and sugar (fees permitting kick-back payments to gatekeepers).There is a sucker in the room and it’s, for sure, the participants and often the employer as well.

Understandably, the overwhelming majority of 401(k) plan sponsors do not have sophisticated investment personnel charged with responsibility for overseeing the retirement plan and cannot afford to. (Recall that over 90% of plans are tiny—under $5 million.) Owners or human resource types dedicating, at best, a few hours a week to thwarting Wall Street sharks intent upon devouring plan assets, don’t stand a chance.

In my investigative experience, it is mind-blowing just how much money can be skimmed by Wall Street from even a single large plan—tens of millions—seemingly unbeknownst to employers.

While investment firms deliberately seek to capture or control plans so they can maximize the profits they derive from 401(k)s, the industry has successfully fought efforts to hold vendors responsible, as fiduciaries, for the plans they bilk. Given industry marketing pitches, it should come as no surprise that employers regularly lose sight of the fact that under ERISA, the sponsor remains responsible as the named fiduciary to the plan even when the sponsor delegates or outsources management of the plan.

The Wall Street bullies have used the 401(k) plan as a cash cow. The undisclosed fees generated by these plans has been staggering at the expense of the plan participants(employees).

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

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