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?

Sunday, June 21, 2009

RIA versus Broker: What’s the Difference?

Although this has been a hot topic in the industry for quite a while, the general investing public does not understand the difference between a broker and an advisor. So, what’s the difference? and why should you care?

It’s actually pretty simple:

RIAs registered with the Securities and Exchange Commission are governed by the fiduciary standard that requires advisors to act in their clients’ best interests. This fiduciary standard of care is the highest know to law and, given a choice, most plan sponsors would prefer to have an advisor who is a “co-fiduciary”. Wouldn’t you prefer to work with someone who is required by law to put your interest first?

On the other hand, broker-dealers registered with the Financial Industry Regulatory Authority (FINRA) are held to the suitability standard that requires them to make recommendations that fit a client’s risk tolerance, objectives and financial status. In other words, brokers are trained and monitored to make sure that they are providing suitable investments, but normally stop short of accepting co-fiduciary status.

At the end of the day, it will depend on the individual broker or advisor, of course…there are great people on both sides of industry. But you might want to think about what happens when the chips are down and you want someone to share, in writing, the fiduciary responsibility

Do You Know Your 401(k) Expenses?

I had a meeting this week with a company who had no idea that his insurance company vendor was paying a subsidy to the Third Party Administator. How do you know if you are getting good value if you can’t account for all the expenses?

I also noticed that the State of Alabama cancelled their deferred Compensation arrangement with Nationwide, and wanted to pass along the following comments:

1) The State Personnel Board cited a lack of financial transparency Wednesday when it canceled a contract with Nationwide Retirement Solutions to provide a deferred compensation plan for active and retired state workers in Alabama.

2) “We’ve leaned over backward to ask these people to come square,” board Chairman Joe Dickson of Birmingham said.

3) Board members say they were unaware the 1994 agreement provided for Nationwide, based in Columbus, Ohio, to make large payments to ASEA. The association’s tax returns show those payments have reached almost $6 million since 2002, board attorney Alice Ann Byrne said Wednesday.

If you are in charge of a 401(k) plan, be sure to ask - in writing - for a total list of fees associated with your plan. Not only is it in the best interest of participants, but it’s good business, as well.

Tuesday, June 16, 2009

New Legislation for 401(k) Fee Disclosure

I sat “news flash” with tongue firmly in cheek. According to the AmericanShareholders.org website,

“House Ways and Means Select Revenue Measures Subcommittee Chairman Richard Neal, D-Mass., has introduced legislation that would require greater disclosure of fees in 401(k) and other employer-sponsored retirement accounts by companies and plan administrators, coupled with tax penalties for failure to comply…Failure to provide such notices would result in a tax of $100 per day, capped at the lesser of $500,000 or 10 percent of a plan’s assets.”

There is an old story about General MacArthur, who was camped beside a large river and needed to get his troops across. He called in his engineer and asked how long it would take to put up a bridge. “Three days” was the reply. “Good, then have your draftsman draw up plans immediately”

Three days later, MacArthur called back his engineer to see how it was progressing.

“Sir, the bridge is finished, and you can take your troops across now provided you don’t have to wait for the plans. They’re not done yet”

The point is, that full fee disclosure is available now if you know where to look. A competent advisor can provide a transparent program, much like the old “visible engine” toys that were around when I was a kid. Yes, it costs money to run a 401(k) plan, but there’s no reason you shouldn’t know what money you are spending and where it goes to.

So…why wait for legislation and the Government to try shining a bright light on the vendors?

Saturday, June 13, 2009

Hardship Withdrawals and Your Responsibilities

As much as you want to help an employee who is having financial difficulty, it’s important to remember that it’s the IRS defintion of Hardship that counts, not yours. If you allow a hardship withdrawal which does not conform to the IRS definition, you run the risk of plan disqualification (monies returned and taxed).

The IRS says that there must be a heavy and immediate financial need and has provided the following non-discriminatory standards:

(1) unreimbursed medical expenses incurred by the employee, the employee’s spouse, or the employee’s dependents;

(2) purchase of principal residence (but not mortgage payments);

(3) payment of tuition and other fees for the next semester or quarter of post secondary education for the employee and dependents.

(4) payments necessary to prevent the eviction of the employee from his or her principal residence or the foreclosure of the mortgage on the
  principal residence.

(5) payment for burial or funeral expenses of the employee’s deceased parent, spouse, children, or dependents;

(6) expenses for the repair of damage to the employee’s principal residence that would qualify for the casualty deduction.

All outside financial resources must be exhausted including plan loans and loans from financial institutions.

There’s more, of course, but this is where plan sponsors sometimes grant a hardship withdrawal even though the IRS does not see things the same way.

If you’re not sure about a hardship request, you should consult your TPA, vendor, or ERISA counsel

Tuesday, June 09, 2009

Safe Harbor Relief for Cash Strapped Companies

The IRS issued proposed regulations which would allow 401(k) plan sponsors to reduce or eliminate the safe harbor match, which you were previously required to maintain for 12 months. Sponsors can rely on the proposed regulations until final regs are issued.

Last fall, many plan sponsors who provide safe harbor plans elected to continue the safe harbor match through calendar year 2009. But as the economy has soured, more and more companies have been scrambling to conserve cash, and sought to eliminate the employer contribution (often, but not always, 3% of pay). Normally, the match must be provided for the entire year once it has been announced at the end of the previous year.

Previously, there were two exceptions to the rule: the plan could be amended to reduce or eliminate the match, and the plan could be terminated.

Now, there are three additional methods:
1) the employer is operating at an economic loss;

2) there is substantial unemployment or underemployment in the trade or business and in the industry concerned; and

3) the sales and profits of the industry concerned are depressed or declining.

As always, the Sponsor should consult counsel for further details and interpretations.

Tuesday, May 19, 2009

401(k) Participatnts Stay Ahead By Rebalancing

Rebalancing your 401(k) portfolio is perhaps the easiest way to increase your investment returns, according to a new study by the Pension Resarch Council. While previous studies have shown that a consistent investment strategy outperforms most actively traded accounts, this study focuses on rebalancing. Over one million participants’ accounts were analyzed, and the results are clear.

According to the study, those who used only balanced or lifecycle funds outperformed on a risk adjusted basis.

The complete study can be found at:  http://papers.ssrn.com/sol3/papers.cfm?abstract_id=942378#PaperDownload

Are your participants aware of this? Often times, there is an initial enrollment meeting, but that’s the end of it. A continuous communication program would give you an opportunity to add value and get the most out of your plan.

Sunday, May 17, 2009

“SINORAMA” and your 401(k)

I recently watched (part of) a baseball game in Toronto between the Yanks and Jays. Behind the batter was a sign which changes every inning or so, and for some reason the name caught my eye: “SINORAMA”. I was a little taken back as I tried to think of what sort of organization, place, or product it could be.

Turns out I wasn’t seeing the whole sign, which was for a casino…as in CASINORAMA.

So, what does this have to do with 401(k)‘s? It occurred to me that plan sponsors don’t always get the whole picture, either. I was reminded this week when I came across a Payroll Company 401(k) proposal with very low dollar cost. And no contract charge (it was a plan with less than $1mm). But somehow the 2.17% fund expenses were glossed over.

Plan sponsors at this level are often the owner/president/CFO and more and may not have the expertise to know what they are really getting. Any time there is a recession or worse, there is more opportunity for someone with a sales quota to say or do anything to get the business. If you can spend a few extra minutes and get the WHOLE story, you’ll get the true cost efficiency you’re looking for.