Westport Benefits Group

Sunday, November 07, 2010

ETF’s in a 401(k)?

There has been a lot of talk recently about the new investment du jour, Exchange Traded Funds. The idea is that these provide low cost access, with the implication that it’s the next generation…somehow better AND cheaper.

We believe that there is a place for ETF’s on the investment menu, perhaps, but a lineup of ALL ETF’s may not be appropriate.

Plusses and minuses?

On the plus side, it’s a great way to access a commodity such as Gold.

But on the minus side: there could be trading charges (3-7 cents per share at one vendor), the custodial fees could be twice as much (at another vendor), and there can be a wide variation of returns from funds that track the same index. There are also the issues of how the ETF accomplishes its performance (futures/options/etc) and the participant expectations for an ETF that trades throughout the day in the real world but only once in a 401(k) environment.

A prudent approach would be to “do your homework” before adding an ETF to the lineup

Saturday, May 01, 2010

Dept of Labor Will Issue Target Date Fiduciary Checklist

There has been a great deal of consternation and hand wringing over Target Funds’ performance during the recent market “episode”. Many plan participants believed that they were safe in, say, a 2010 Target Fund since it was designed to decrease risk based on expected retirement date. It turns out that each Target has its own idea of what constitutes risk for a 62 year old participant.

The Dept of Labor is now stepping in with a checklist (available soon) to help sort out this mess. Here is the announcement: http://tinyurl.com/2dd8kfp

Westport Benefits Group also provides insights into Target risk, performance, and style; one size does NOT fit all. Call/write for details

Monday, December 21, 2009

Time to Rebalance Your 401(k)

According to a study by The Wharton School, 79% of 401(k) participants make no trades within their account over a 2-year period.

The advantages of rebalancing have been well documented, but here is a good way to look at it. Suppose that several years ago you completed the allocation exercise in your enrollment book and decided that a 60% equity/ 40% bond allocation was appropriate….and you did nothing further. You may very well have had an 80/20 allocation when the market went sour…meaning that you took a bigger hit than you needed to.

By rebalancing on an annual basis, you “snap back” to your original 60/40 allocation, which is the one you wanted in the first place. And you take the emotion out of trying to guess how much higher the market will go, where the “top” is, etc.

Most 401(k) platforms have an automatic rebalancing feature, so there is really no excuse. You don’t need to mark your calendar, just check the box.

If you set it now for rebalancing every January 1, you’ll be ahead of the pack at retirement time.

Monday, December 14, 2009

Brightscope 2009 Top 30 401(k) Plan List

Brightscope, an organization which rates 401(k) plans on how effective they are in getting participants to retirement, has announced their top 30 plans for 2009. As you might suspect, these are LARGE plans who have the resources to provide (if they want to) the highest possible quality plan, and some have the resources to provide a “can’t miss” experience.

For instance, the number one plan on the list provides a 100% match on the first 9% of contributions.

But the information IS useful when it comes to designing your own program. There are common themes and “best practices” which can be adopted regardless of your resources…like shortening the eligibility time. If you have a 6 month or one year wait because of high employee turnover, you may want to leave it be. However, if it’s 6 months and nobody knows why (“its always been that”), then you may want to revisit.

For a look at the complete list of top 30 plans and the criteria used, here is the link: http://tinyurl.com/y8rv5oz

Saturday, December 05, 2009

You and LaRue

Its been over a year since the Supreme Court ruled that individual participants in 401(k) and other retirement plans subject to ERISA can sue plan fiduciaries to recover investment losses from their accounts. Although it caused quite a stir at the time in the vendor and legal communities, we are surprised that many plan sponsors are still either unaware or are dismissing it as unimportant.

It IS important, and it’s easily addressed. If you have an up to date Fiduciary File and you are working with an advisor who can act as a co-fiduciary, you’ll be able to thoroughly protect yourself, starting with these two critical areas:

1) reviewing the plans’ investment policies and procedures designed to ensure that the plans’ investments options are prudent

2) analyzing (and documenting the analysis of) fees charged by service providers.

You’ll gain fiduciary protection, identify (and probably improve) your expense structure, and optimize you fund lineup.

Saturday, October 17, 2009

ETF’s in a 401(k) Plan?

If you are looking to maximize performance in a 401(k) plan, a good place to start is with fund expenses. A Government Accountability Office report illustrates exactly how much expenses matter: over the course of 20 years, a $20,000 investment, earning 7% annually and paying 0.5% annual fees, will grow to about $70,500. But if fees are 1.5%—a mere 1% difference—that same $20,000 will only grow to about $58,400. This is approximately a 17% reduction in asset value.

A 401(k) fund menu made up primarily - or exclusively - of ETF’s can address this issue, but you do have to shop around. Because ETF’s aren’t laden with subsidies, you probably won’t find them inside packaged programs (like those from insurance companies). And a broker might be hesitant to bring them to your attention (no commisssions bulit in, either).

But an advisor, who charges a fee, is a good candidate. An advisor can easily choose ETF’s and build portfolios using one of several available platforms and, because the advisor, ETF, and platform fees are all transparent, you can be assured of low cost performance.

Sunday, August 09, 2009

The Best Book We’ve Seen on 401(k)‘s

For those of us who meant to write a book which tells everything there is to know about 401(k) Fiduciary duties, well, Josh went ahead and did it. It came out last year to great fanfare, but we are still surprised at how many 401(k) plan sponsors still don’t “get it”.

Josh has briefly - but completely, provided a step by step guide to fulfilling these duties which, by the way, leads to a low cost, high performing plan you can be proud of. In addition, the book shows how to address the fiduciary liablity question in order to protect youself…it’s still a PERSONAL liability at the end of the day.

And he explains who the players are…this chapter alone is worth the price of the book. When you see who has a vested interest in what, it becomes clear where there can be conflicts of interest or worse.

For more information, you can visit Josh’s site: http://www.fixingthe401k.com/

Sunday, August 02, 2009

Make Wall Street Put Investors Best Interest First

We don’t usually go in for petitions, but we feel that this one is worth signing…and worth it for others, too.

At stake is whether investors will continue to be serviced by brokers who use a “suitability” standard, or Advisors, who are required by law to put their clients’ interest first.

There is a long list of abuses by FINRA supervised brokers, who can easily be tempted by certain products that pay a bigger commission, stocks or bonds which are recommended by a sales manager (‘Let’s put some lipstick on this pig”), trips to exotic places, account churning, and more. And, of course, there are a great many brokers who rise above this and provide exemplary advice/service by adopting a fiduciary standard even if they don’t have to.

But shouldn’t everyone do that? What kind of finacial system has two sets of rules like this?

In case you haven’t guessed, we are in favor of a Fiduciary Standard: the clients’ interest always come first. Period.

To see the petition and view a more in depth discussion of this subject, please go to:  http://tinyurl.com/nsr97g

And thanks to our friends at fi360, the Center for Fiduciary Studies, for being pro-active on this matter

Friday, July 17, 2009

Snakes On A Plan

If you’re not paying close attention to your 401(k) plan, you may be in for the same kind of thrills as the movie with a similar name. So…what can you do to make sure that your 401(k) plan has a terror free summer?

The best overall strategy is to benchmark your plan against other vendors, especially if you haven’t done so in the last three years. Just like any other industry, some vendors are more aggressive than others at any particular point in time, and several insurance companies have had a tough go of it. Make sure you have the right combination of funds and expense structure.

If you don’t have a regular procedure to monitor funds, then now is a good time to start. June 30 numbers are fresh and readily available

Saturday, June 27, 2009

Do you have a 401(k) Investment Policy Statement?

One of the primary obligations of a 401(k) plan sponsor is to prudently identify, retain, and monitor the investment options in the plan. According to several industry surveys, there are as many as half of all plans which have no written guidelines for doing this. The written guidelines are known as an Investment Policy Statement (IPS), and there are lots of templates and resources which make it easy to do.

A good IPS will define the investment categories which are available to the trustees, and give specific guidlines for inclusion/elimination of a fund. We like the fi360 approach (http://www.fi360.com) which consolidates factors such as manager tenure, performance (of course!), style drift, composition, alpha, Sharpe ratio, and more into a Fiduciary Score of 0-100. But there are others, as well - the important thing is to choose an IPS that you are actually going to follow. I would have to consult with counsel to say which is worse: no IPS, or an IPS that you don’t pay attention to. Probably the latter.

So, if you don’t have an IPS, get one. Now.

And if you have one, make sure that you are following the guidelines.

The funny thing is that, if you follow the guidelines and make sure that you always have the best available funds, you’ll have better fund performance and a happier participant population. Why wouldn’t you?