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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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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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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Use of managed 401(k) funds on the rise

Plan sponsors that really promote the use of managed portfolios by their employees will help provide a successful retirement. Most plan participants do not have the knowledge or discipline to manage their own portfolios. Many either do nothing or chase hot performing sectors or funds with dismal results.

Day 236: K'nex
Day 236: K’nex (Photo credit: -Snugg-)

The problem: Many folks don’t join their 401(k) at the earliest opportunity, they don’t save enough, and they fail to diversify and manage their accounts. That can cost workers tens of thousands of dollars, or more, in reduced savings for retirement.Are Your 401(k) funds money losers?
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The good news is that more employers have made changes to their 401(k) plans to help employees. A big change for many 401(k) plans is the “opt-out 401(k),” where enrollment in the plan is automatic as soon as an employee becomes eligible to join. This simple change takes advantage of the power of inertia. New employees are automatically enrolled in a company’s 401(k) plan, and they must officially ask to discontinue contributions if they do not want to enroll. The “automatic enrollment 401(k) plan” has proven to increase the number of employees who participate in plans with this feature.

The addition of managed allocation services to your plan is like adding a pension fund like plan to your company sponsored retirement plan. It reduces fiduciary risk and improve results for all plan participants involved.

Please comment or call to discuss how this would improve your 401(k) plan.

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How to Cut Expenses From Your 401(k)

Plan particiapnts will become aware of the total costs they are paying after the 3rd quarter statements are mailed. Are you ready for their questions?

Expense Reports
Expense Reports (Photo credit: mynameisharsha)

An even more pertinent question is how much of the expense burden is being borne by your employer. In most cases, you’re paying most of the expenses out of your fund assets because 73 percent of plans surveyed pass along all the costs to participants, the Government Accountability Office said in a report earlier this year.Often employers had no clear idea what their plans cost, the G.A.O. found. They may not have had a clear incentive to fully evaluate them and reduce expenses because they typically aren’t paying for them. The new disclosures may not prompt more employers to pick up the bill for middlemen expenses, but they could lead to paring expenses passed along to you. It also helps if major executives have money invested in the plan; then you can solicit their support for a plan audit and overhaul.

Many plan participants believe that their employer knows best and will provide the best funds available. This is often not true, although plan sponsors are unaware of this fact.

Please comment or call to discuss.

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Fidelity 401(k) Price-Fixing Scheme Cost Retirement Savers Plenty

Bigger does not necessarily mean better. The Wall Street bullies have taking advantage of investors for far too long. Relying on Wall Street to take the best interest of the client first is a very dngerous strategy.

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

Employers that hire Fidelity to provide 401(k) administration have always been told they can freely choose between Fidelity and non-Fidelity funds as investment options.  In my experience, freedom to choose, in industry parlance “open architecture,” rarely truly exists. 401(k) plan administrators or record-keepers almost always attempt to steer clients into proprietary products and services. The challenge for employers and participants is to understand the unique devices different plan administrators employ to lead clients into their own funds and the related dangers.There’s a lot of blame to go around for the failure of 401(k)s to achieve their even limited potential to provide retirement security to workers. Investors should not rush to conclude that they or unforeseen market forces are entirely to blame for the poor results of their 401(k) accounts.  I can assure you that there have been longstanding 401(k) abuses that have been concealed from employers and participants by the industry. Even regulators have failed to grasp the extent of industry skimming.

In a truly competitive environment, with the requisite transparency, Fidelity’s policy of capping 401(k) revenue sharing would have had economic consequences. The fact that it did not reveals that in the retirement plan industry, pricing machinations are not readily apparent.

Plan sponsors should begin to realize that the ‘big’ providers do not have their best interest in mind when making recommendations.

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

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Three Outside-the-Box Tips for 401k Plan Sponsors

The 401(k) plan your company sponsors is the sole source of retirement for all your employees. Please do not rely on your broker to provide a prudent plan.

Employee of the Month Reserved Parking Sign
Employee of the Month Reserved Parking Sign (Photo credits: myparkingsign.com)
  • Cut the number of investment options in your plan by half. If you operate a typical plan, you’re dumping more than a dozen different choices on your employees all at once. Give them a break. They work for a living (or so you hope). Don’t make investing in their retirement more work for them. Countless studies have proven folks just plain clam up when confronted with too many options to choose from. Make life easy for them. Give them less to choose from.
  • When presenting investment performance for long-term options (which should be most of the ones offered in your plan), emphasis rolling 5-year performance. Why 5 years? Because that’s the minimum amount of time most professionals consider “long term” and because it allows those one-in-a-million performance years that tend to skew 10-year or since inception returns to roll out quicker. But the most important reason is to avoid unduly emphasizing short-term volatility that longer holding periods tend to dampen down. Research shows, when presented with the ragged chart of volatile one-year returns, 401k investors tend to investment more conservatively than they should. They have a lifetime to grow their retirement nest egg. Encourage them to do so by framing investment performance in a more useful – and less misleading – manner.
  • Nuts! We just wasted two of our three wished on investment related items. They’re not even the most important factors that lead towards a great retirement. That brings us to our final tip: stop advertising investments. Retirement plans aren’t about investing (although investing is a byproduct), they’re about saving. When you offer those general education sessions, make sure at least three-quarters of the time is spent on showing those wide eyes in attendance why saving is the most influential component that determines whether or not they will retire in the lifestyle they desire. Tell participants that using their 401k plan is not rocket science, it’s simple math: the more you save today, the better off you’ll be tomorrow.

Your company sponsored retirement plan is the sole source of retirement for your employees and yourself. We must improve the quality to improve participation as well as the results.

Please comment or call to discuss how this can improve your ability to attract and retain top employees.

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

Plan sponsors have relied on their banks to provide their company sponsored retirement plans. These same plan sponsors believe that the banks and insurance comapnies have their best interest in mind. Wrong.

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.

Many plan sponsors are guilty of using service providers that use the 401(k) plan as an add on service. This creates a cash cow for the financial services industry.at the expense of the plan participants.

Please comment or call to discuss.

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5 steps to accommodate major 401(k) compliance deadline looming August 30

New regulations are becoming effective soon and there will be more coming. Please take the time to review your 401(k) plan periodically to protect yourself and your employees.

English: Logo of the German Internet Service P...
English: Logo of the German Internet Service Provider 1&1, subcontrator of United Internet Deutsch: Logo des Internet Servie Providers 1&1, Unternehmen in der United-Internet-Gruppe (Photo credit: Wikipedia)

To deal with these challenges: 1. If you haven’t done so already, get to work pronto on the fee disclosures due August 30. The first step is to determine whether your service providers have fulfilled their regulatory obligations by supplying the fee information – including the specific services being provided for each amount – to your company.

2. If you’ve received this information, set to work interpreting these documents. This can be a lot tougher than it sounds, as some plan providers are burying pertinent information in lengthy documents. If, at the outset, this task seems too difficult or time-consuming, consider hiring an independent fiduciary advisor to assist you with this, as well as with benchmarking your fees against the market. Using a fiduciary can significantly reduce your company’s liability.

3. If service providers have failed to supply the required fee information, document this by writing to them and requesting speedy submission. This can insulate you from liability for not disclosing the information to employees on time. If these providers don’t respond immediately (after all, the deadline is fast approaching), protect your company by blowing the whistle on them with the DOL.

4. Prior to making the fee disclosures this month to employees, notify them in meetings and/or in emails of what is coming their way. Tell them this is the first step in a process to review – and, possibly, to lower – fees and to improve service, including the provision of better plan education. Again, an independent advisor can help with this.

5. Throughout this notification/disclosure process, document all questions that employees ask and the answers they receive. This helps manage your legal and regulatory liability, and it helps you develop the best answers to give when the same questions come up again.

Your service provider may have buried the necessary information in mounds of paper work. If this is the case, please seek the assistance of an independent fiduciary. These regulations may seem daunting and very confusing, but with the proper help easily accomplished.

Please comment or call to discuss.

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