Not only do plan sponsors have a fiduciary responsiblity to provide a prudent 401(k) plan they should be concerned about the welfare for their employees. These transparency rules provide the tools to do just that. The Wall Street bullies have used the 401(k) plan as a cash cow for far too long.
Now, finally, many employees will see just how much their accounts have been whittled away by fees — fees that, in this market especially, can spell the difference between making money and losing money in a given investment.
Regardless of their size, companies that fail to comply with the new rules may be hit with severe fines and other sanctions.
Many people aren’t aware that when it comes to their 401(k) plans, employers and employees are basically in it together. Companies don’t benefit from substandard or overpriced plans. Indeed, top managers suffer because they invest in these plans themselves.
Plan participants(employees) need to pay more attention to their company sponsored 401(k) plan. This vehicle is your sole source of retirement and have more to say about the quality and value for the fees you pay.
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Regulatory changes due in 2012 will help plan participants see how much their 401(k) is costing them. This new clarity of fees will force plan sponsors to take an overall examine of their company plan.
In this, the year before a new series of fee disclosure regulations take hold, plan sponsors’ sense of fees paid by their plans was all over the board. About a quarter of mega plans (those with more than $1 billion in plan assets) said that the “approximate average expense ratio” of all the investment options in their plan was less than 25 basis points (0.25%), a sentiment expressed by nearly one in eight overall. Nearly half of those mega plans said the overall fee was between 25 and 50 basis points, but 8.2% in this market segment said they “didn’t know.” Indeed, the “don’t know” group was a significant group across market segments; one in 10 in the mid-size (plans with between $50 million and $200 million in plan assets) and large (between $200 million and $1 billion) categories admitted that, as did more than 18% in the small-plan (between $5 million and $50 million in plan assets) category, and a full third of those in the micro-plan segment (plans with less than $5 million in plan assets).
That said, more than two-thirds (70.4%) of plan sponsor respondents said they review plan fees annually, and the larger the plan, the more likely they were to do so. However, 6%—mostly among those in the micro-plan segment—admitted they “never” formally review actual administrative costs/fees. In a new question in this year’s survey, we asked who was paying those administrative/recordkeeping costs—and, perhaps somewhat surprisingly, a clear plurality (34.6%) said the employer did, and did so exclusively, a finding that included nearly half of micro plans, 29% of small plans, and 15% of plans in the larger segments. On the other hand, larger plans were significantly more likely to say that participants were carrying the costs through revenue-sharing arrangements. In fact, more than a third of mid-size and large plans did so, as did more than a quarter of those in the mega market.
There are excellent alternative retirement plans which will attract and retain top talent. Potential employees are beginning to look for retirement plans with a hands off approach. They would prefer to have professionals make the choices.
“Employers shouldn’t put all of their money into private equity because that was delivering huge returns at one point, but then it just collapsed,” Mohindra says. “At the same time, you don’t want to put everything into bond funds, which would basically earn very meager returns. That wouldn’t give them what they need.”According to a recent study by the Employee Benefit Research Institution, defined benefit plans have been on a steady decline since 1979 compared to its counterpart, defined contribution plans. While this decline may be true, Mohindra wouldn’t be surprised to see defined benefit plans grow in popularity because they pose less individual risk.
“I think the pendulum has probably swung too far in the direction of defined contributions, so the individual is at risk now,” Mohindra says. “With defined contribution plans, the employer has devolved to risk to the employee and only bares administrative costs, but companies can draw the top talent they need for the long term by offering them a better deal regarding their retirement arrangement.”
There are alternatives to the traditional defined benefit plan that many employers including small employers can implement to attract talent.
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If you are looking to add a qualifed retirement plan for your employees and yourself, multiple employer plans are a great choice. However, choosing the right sponsor is vital.
MEPS have become very popular of late and have certainly become a burgeoning businessfor me. That being said, any burgeoning business will bring in the entry of many new players in the market. The problem for the MEP area, it may bring in a lot of providers that have no background in MEPS or understand how they actually operate.There has been discussion of late of the Department of Labor (DOL) looking at MEPs of late because someone asked someone from the DOL at some benefits conference. The person for the DOL said that they would be taking a closer look at MEPs that are “open”, meaning that the plans are not affiliated through an association like a bar association or some type of civic group. Low and behold, a lot of people started to act as if the MEP sky was falling. You had advisors questioning of having their clients in MEPs and plan providers consider curtailing their interest in them. Calm yourselves, will you? The sky isn’t about to fall just yet and there is no reason to panic. Having someone from the DOL say something at some Midwest benefits conference is hardly regulation. However, if you read between the lines, I think MEPs that really look like individual plans bundled together for the sole purpose of avoiding separate 5500s. What types of MEPs are these? I think MEPs where you have the third party administrator (TPA) or a registered investment advisor as the plan sponsor. If the plan sponsor is an association or a company that is unrelated to the TPA, I don’t think you have anything to worry about. If I’m wrong and the DOL is going to act on open MEPs, they would offer some relief to wind them down and allow the participating employers to spin them off.
Multiple Employer Plans are a great alternative for business owners looking to provide a qualified retirement plan for their employees without the work and complexity. An additional benefit is minimized risk to the employer.
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The 401(k) plan of today is the main source of retirement for most employees. We must begin treating it as such and offer a ‘pension fund’ type plan. This will maximize everyone’s outcome. Following a disciplined, strategic plan leads to success.
But inertia can work to our advantage. To coax greater participation, many firms automatically enroll new hires in the 401(k) plan at a low level — say, 3 percent of their salary. Employees are given the choice to opt out, but most don’t. Studies show that automatic enrollment increases the number of people in a plan by 20 percent.Some critics say automatic enrollment smacks of paternalism. Frank Satterthwaite, an executive with Vanguard who works with institutional clients on retirement plans, disagrees. “To me, paternalism would be I’m putting you in the plan and I’m not letting you out,” he says.
He advises his corporate clients to turn human behavior to their advantage. As behavioral studies show, we tend to make the best choices when presented with fewer options. We also tend to prefer simpler choices and to accept the first ones we’re presented with. So Satterthwaite recommends that the first choice in a 401(k) plan should be a one-stop, target-date retirement fund.
Many investment professionals see the 401k business as a lead generation tool. Once implemented they focus on selling additional products to the plan participants. This will be controlled when the fiduciary standard becomes effective. Your company retirment plan is far too important to your employees and you.
“The emergence and organization of professionalretirement plan advisors will have a profound impact on our business over the next five years,” said Joe Masterson, Diversified senior vice president. “These professionals are dedicated to the retirement plans business, and therefore are well-suited to understanding plan compliance, designing appropriate fund arrays, positively impacting plan design and helping participants achieve funded retirements.”Professional retirement plan advisors will be influential in provider searches. Among plan sponsors switching providers, 35 percent will use the services of a professional retirement plan advisor. However, only 10 percent of plan sponsors will actually change service providers annually through 2015, while more than one-third of plan sponsors will perform due diligence of their service provider and 17 percent will add or replace at least one investment option.
The retirement plan (401k) professional will be dedicated and specialize in the management of the retirement plans. Gone are the days of giving the company retirement plan to any “adviser” or “broker”. We must of a better job of providing a prudent plan for employees. Risk management must be a factor when implementing the retirement plan benefit.
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