Re-enrollment Effective in Boosting 401(k) Participation

Of all the changes a plan sponsor can make to improve participation and improve their employees’ ability to retire adding auto enrollment and auto escalation will be the most effective. Most plan participants are looking to their employer for guidance. You, the employer, have significant influence on how your employees save for retirement.

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Because many 401(k) plans were started before the advent of target-date funds, lifestyle funds or managed accounts, many long-term participants did not have an opportunity to select those funds when they entered the plans, he said.“There is evidence that once participants have made their initial elections, they make few, if any, changes— the so-called inertia effect. As a result, a re-enrollment process causes participants to revisit their investment preferences and their objectives and to decide whether to accept the default into QDIAs,” he said.

Re-enrollment improves participant investing, but fiduciaries also receive important protections if they follow the default process as outlined in the DOL regulation. For participants who default, plan fiduciaries are responsible for investing their money and may be liable if they don’t use QDIAs. Also, according to the report, fiduciaries are only protected from imprudent participant investment decisions if the plan complies with the requirements of ERISA 404(c).

Auto enrollment and auto escalation are the best methods to increase plan participation and help more Americans successfully retire. I propose that we convert the 401(k) plan into more of a pension fund like plan. Turning over the plan to professionals will add discipline and success.

Please comment or call to discuss how your company 401(k) plan can be improved for all.

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Seven 401(k) Strategies for 2012

There are seven strategies listed in this article. In my opinion, the most influential is managed portfolios. By offering a more pension fund like plan your company will improve the quality of your plan to the point of becoming a true employee benefit. The most effective plans will automatically put an employee, based on age, into a risk adjusted globally diversifed portfolio. As the employee ages the portfolio will be adjusted to a more conservative risk level. The employee have the option of choosing a more conservative or aggressice portolfio or opting out of the models all together a choosing their own mix. The majority will do nothing and stay in the age appropriate portfolio. This one action will improve results.

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Reconsider custom target-date funds. Custom target-date funds are tailored to a plan’s specific participant demographics rather than a standard target retirement date that a plan provider applies to all of its clients. These funds and other “default investments” are now cost-effectiveat much lower asset levels, owing largely to efficiencies gained from the growing number of plans employing automatic enrollment and automatic escalation of participant contribution levels, says Toni Brown, director of U.S. client consulting for Mercer’s investments business. 

This one strategy will do more to improve the results of your plan than any other. By automatically putting plan participants in an age based professionally managed globally diversified portfolio results will dramatically improve over the long term.

Please comment or call to discuss how to make you compnay 401(k) plan a pension fund like plan.

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Are Target Date Funds The Answer?

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Target date funds have become popular with 401(k) plans (defined contribution) because of their simplicity. Based on the participant’s age a projected retirement date is determined, for example a 37 year old will retire at 65 in 2040. Therefore this participant would choose the 2040 portfolio and as the participant ages the portfolio would automatically become more conservative. Problems arose during the ‘Great Recession’ participants in the 2010 portfolios thought they were very conservative and lost 38%. Hardly the conservative choice participants expected.  It turns out all target date funds are not created equal.

An alternative has been gaining momentum. Professionally managed risk adjusted globally diversified portfolios. These portfolios have a defined expected return and expected volatility (risk), there will be no surprises. These portfolios, like target date funds, provide a pension fund like investment without the uncertain level of risk. Managed portfolios provide a level of clarity and defined risk and volatility.

The Pension Protection Act of 2006 allows plan sponsors to utilize the Qualified Default Investment Alternative QDIA. This Act allows the participant to be automatically put into the appropriate portfolio based on their age. The participant is moved automatically, to a more conservative portfolio as the participant ages.

In this plan design the participant has three options:

  1. Remain in the default portfolio
  2. After an assessment determine the proper level of risk and adjust the portfolio either more conservative or more aggressive.
  3. Opt out of the model portfolios and choose their own fund mix.

Combine this design with the plan sponsor hiring an ERISA 3(38) Investment Manager and the plan sponsor will realize minimized fiduciary risk and a quality retirement plan for their employees.

A number of studies have determined that most plan participants prefer the model portfolios (QDIA) to choosing their own fund mix. After experiencing the extensive volatility participants are looking for guidance from their employers.

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Younger Investors Not Shy About Stocks in 401(k)s

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This is a great indicator of the importance equities have in the overall health of any economy and young Americans recognize it. Most baby boom and earlier investors have an all in mentality when dealing with equities. Their thought process must become controlling risk and know what their expected return and expected volatility are. This will reduce their anxiety with stocks.

About 21 percent of savers in their sixties had more than 80 percent of their accounts invested in stocks last year compared with about 40 percent of investors in 2000, Holden said. “We see a tempering of the allocation to stock The process must include our older participants,” she said.

No Equities

Separate studies by ICI have shown that U.S. households are less willing to take on financial risk in the wake of the financial crisis in 2008, said Holden. Concern that younger individuals may be timid about buying stocks hasn’t been borne out by the data on 401(k) participants, she said.

The Standard & Poor’s 500 Index (SPX) gained about 826 percent over the 30-year-period from Dec. 31, 1980, to the end of 2010.

The number of younger workers without equities in their 401(k) accounts also decreased at year-end 2010 to 9.4 percent from 14.6 percent in 2000, said Jack VanDerhei, research director at EBRI.

“A lot of that may not necessarily be due to employees themselves actively making that choice as much as it’s them being automatically enrolled, being put in target-date funds,” VanDerhei said.

The ‘Great Recession‘ may have changed the younger generation into investors rather than speculators like the baby boomers. By following three simple rules, own equities, globally diversify and rebalance investors will succeed in reaching their long term financial goals.

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

  • Why Gen Y Still Invests In Stocks (huffingtonpost.com)
  • Younger investors save more for retirement (401kplanadvisors.com)
  • Study: Boomers Making More 401(k) Investing Mistakes Than Younger Folks (401kplanadvisors.com)
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Ameriprise workers sue over company’s own 401(k) funds

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When the new fee disclosure regulations become effective next year (2012) there may be an increase in cases such as this. Plan sponsors are responsible and should begin taking precautions. If nothing else it may hurt relations with their workforce.

The workers allege that Ameriprise and its committees, as the plan’s overseers, violated their fiduciary duty to the retirement plan. Investments in the 401(k) plan included mutual funds and target date funds from Ameriprise subsidiary RiverSource Investments LLC, which is now known as Columbia ManagementInvestment Advisers LLC. Between 2005 and March 2007, an average of $500 million in plan assets went annually into RiverSource and Ameriprise Trust Co., the trustee and record keeper of the plan, according to the complaint.Ultimately, the investment generated fee revenue for RiverSource and its affiliates, as well as for Ameriprise Trust Co., the plaintiffs claim. Further, the funds themselves were costly when compared to offerings from The Vanguard Group Inc., the workers say.

Every employer which sponsors a 401(k) plan for their employees is responsible for the selection of prudent investments for their plan. This includes financial institutions which provide such funds.

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

  • Plan “Symptoms” that it’s time for a Review (401kplanadvisors.com)
  • Study: Boomers Making More 401(k) Investing Mistakes Than Younger Folks (401kplanadvisors.com)
  • Study: Too Many Choices Impair 401(k) Decisions (401kplanadvisors.com)
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Study: Boomers Making More 401(k) Investing Mistakes Than Younger Folks

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To clarify getting advice includes individual advice, professionally managed portfolios or target date funds. I believe the best option is professionally managed portfolios which will become more conservative as we age. Remember your portfolio is like a bar of soap the more you touch it the smaller it gets.

While the median annual return was 2.92 percentage points higher (net of all fees ) for those getting advice during the five years studied, it was only 2.19 percentage points higher if the stock market rebound year of 2009 is excluded. A large part of that 2009 effect was created by boomers who abandoned stocks at the bottom.  “Reverse market timing,’’ is the ways Pamela Hess, director of retirement research at Aon Hewitt described it in a phone interview last week.  “The near retirement cohort has become very loss adverse. They’re gun shy. They get out after the market has digested a lot bad news,’’ echoed Chris Jones, chief investment officer of Financial Engines, who was also on the call.The share of 55 to 60-year-old workers with less than 5% of their money in stocks rose from 9% at the end of 2007 to 14% at the end of 2008. Meanwhile, for those 60 plus, the percentage rose from 13% to 18% and for the 50 to 55 age cohort, it climbed from 7% to 11%.

The most successful plans will provide professionally managed portfolios only. This allows employees only to choose the risk level of their account. Many experts consider this a ‘pension fund‘ like plan which leads to successful retirements. This, after all, is everyone’s goal.

Please comment or call to discuss how this would work for your company.

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401(k) study: Help can improve performance by 3 pct.

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The real secret to investing for a successful retirement is a globally diverisifed portfolio and disciplined rebalancing. Your retirement account should be managed much like a pension fund. Exclusively providing professionally managed portfolios will increase results and reduce anxiety.

REBALANCINGFailure to periodically rebalance a portfolio can also hurt returns. By rebalancing, investors adjust the allocation between stocks and bonds in their portfolios to ensure their investments reflect their appetite for risk. For instance, in a market where stocks surge, a portfolio can become too heavily invested in stocks unless the accountholder moves some of that money from stock funds into bonds or other assets.

Failure to rebalance after a market surge or drop leaves a portfolio at risk to underperform.

COMPLACENCY

A large segment of 401(k) accountholders have historically been complacent about their investments, failing to do anything with their account for years.

“Rather than do something wrong they’re just not doing anything,” said Pamela Hess, director of retirement research at Aon Hewitt. “With all the volatility in the last few years, I think folks don’t know what to do and a lot are just doing nothing.”

More workers with 401(k) accounts are using some form of help, Hess said. An earlier study of 401(k) accounts indicated about 25 percent of workers used help with their investments in 2009. As of the end of 2010, about 30 percent of workers were using help.

Hess points out it, however, that still means about 70 percent of workers don’t get help.

“This study really quantifies the fact that he gap between doing things on your own and what you can get with professional help does in fact get substantially wider during periods of volatility and economic stress,” Jones said.

While acknowledging that some forms of help including managed accounts carry higher costs, Jones said the difference in performance outweighs the increased cost.

Managed account fees typically range from 0.20 percent to more than 1 percent of the account balance. Target-date fund fees can range from around 0.18 percent to more than 1.5 percent of assets.

Professionally managed accounts provide most employees with the best opportunity to successfully retire. This assumes the employees remains disciplined and consistently contributes to their account.

Please comment or call to discuss how this would affect you and your employees.

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Hard Choices for Americans looking to retire.

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Just like the government Americans need to save more and spend less. This is fiscal responsibility and each one of us is accountable.

Though the “auto” plan features of the Pension Protection Act of 2006 were a good start, we need to go further. Automatic enrollment is a great way to get more participants into their 401(k) plan, but deferring them at 3% into a one-size-fits-all target-date fundfilled with an overwhelming percentage of active equities is not the solution that will get participants to a successful retirement.With obvious exceptions, most should start at 10%, increasing with each raise. Some people cannot afford it, and some do not need it, but double-digit deferral applies to the other 90%. Worst case is that participants will be saving more money than they need.

Just as the U.S. government is being forced to make hard choices about the national budget after a decade of overspending, participants have to make tough decisions about where they live, what they drive and how much discretionary income they spend.

The formula to a successful retirement is simple save at least 10% of your earnings in a qualified plan, use a globally diversified portfolio and control your spending.

Please comment or call to discuss how your plan is doing.

  • Overspending puts baby boomers retirement at risk, expert says (401kplanadvisors.com)
  • Mass Public Revolt Over Proposal to End Retirement Plan Fleecing (401kplanadvisors.com)
  • US agency will repropose plan for a fiduciary standard (401kplanadvisors.com)
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Asset Allocation Models Are The Only Way Forward For 401k’s

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Managed portfolios have many advantages over target date funds for both the participant and the plan sponsor. The participant will increase their retirement success and the plan sponsor will reduce fiduciary concerns.

By using asset allocation models on a platform which allows investment managers to design models for participants, then have these participants move automatically through the models based on age (similar to how participants would automatically receive an adjusted asset allocation in a target date fund), the needs of the un-engaged are best satisfied by low cost investments (cost) and growth from professional management (compounding). Likewise, the engaged receive added benefit (contribution), allowing contribution rate to be easily calculated and presented with clarity. This process can be further enhanced through the use of an integrated retirement calculator (as the primary engagement option) which incorporates payroll data with the long term performance history of each asset allocation model. The result- contribution rate is calculated automatically; no manual entry or external statement reference required. Implementing plans in this way could have an absolutely substantial impact on the ability of participants to develop adequate retirement funds.

These managed portfolios allow the participant to see what is happening in their plan, clarity. This adds a certain comfort level. As a participant ages his allocation becomes more conservative unless they decide not to.

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

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