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| Your 401(k) Resource
October 2008 |
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Andrew Sweeny, Jr.
Vice President
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For more information about these topics, please contact
Andy Sweeny
at 513.745.0707.
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Greetings!:
Some individuals outside of the investment industry think someone inside the industry has secret knowledge of the market or has a corner on a particular truth that allows one individual to profit while everyone else loses. I believe there is no single truth in the investment business, but rather a number of investment truths. I have listed a number of truths about the market. I hope they provide a measure of comfort in these volatile times.
- Look at the historical returns of Large Stocks, Long Treasuries, Long Corporates, and T-Bills. Over time the record shows the best, albeit the most volatile, place to be is in Large Stocks.
- Market timing does not work. Often knowing when to step aside is not difficult, but when to get back in the market is an extremely difficult decision.
- Understand the lessons of the efficient frontier as it relates to stocks and bonds. By having a balance of stocks and bonds in your portfolio, you can reduce risk significantly with a minimal reduction in return.
- Make sure you have a well diversified portfolio.
- Know your investment goals, time horizon, and your ability to handle risk.
- Volatility in the stock market is normal. Today's bear market is laying the groundwork for the next bull market.
- Consider increasing your contribution to your retirement plan.
- Don't panic. Stay the course.
See full article, with illustrative graphs, written by Andrew Sweeny, Jr., with HORAN.
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Tough Times Have Employers Looking to Improve Retirement Benefits
It may be difficult to see the silver lining of a recession, but the truth is that bad economic times provide many opportunities for employee benefits advisers. A new Hewitt study shows that companies are more actively managing their retirement plans this year and focusing on reducing retirement plan risk. Experts agree economic uncertainty reinforces this trend. |
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| Matches hold strong. Employers are trying to reduce fees and cut administrative costs, but - at this point -they are not reducing benefits. Matches are not going up across the board either, according to Hewitt's research. Just 12% of employers plan to add to or increase the company match this year, and a fraction of that (2%) plan to reduce or eliminate the company match.
Participant review. Employers can reduce costs in their retirement plans by eliminating former employee coverage. Fidelity Investments conducted a study and found 30% of participants across all their plans were no longer with the sponsoring companies; therefore, employers have the opportunity to produce significant savings. Having terminated employees on a plan increases costs because it increases the total members and decreases the average asset size of the plan. The smaller the average account size, the more expensive the plan.
Communications Boost. Although employers are watching their bottom line costs, they are also focused on easing employee nerves about the economy. Hewitt has seen a slight uptick in loans and a slight uptick in withdrawals. Employers are not making those features less available; they are instead focused on communication, making sure employees fully understand the implications of those actions.
See full story, located at Employee Benefit Adviser.
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What Plan Fiduciaries Should be Doing
While there are no new standards or guidelines to reveal, this paper offers a collection of best practices to consider in the formation (or formalization) of an investment committee, the drafting of investment policy statements or the review (and improvement) of procedures. Of course, as in any area involving compliance, no significant steps should be taken without first seeking the input of legal counsel.
Investment committees provide a focus. ERISA fiduciaries are subject to the highest standard of care known to American law, which means any fiduciary has a lot of work to do. Limiting the responsibilities of the committee to investments only allows the committee to focus on the implantation of an investment plan, its monitoring and any changes that are needed, and nothing else.
Committee composition. Ideally, the investment committee should be composed of at least three people; a range of experience and outlooks helps the committee to consider all the relevant factors. The odd number helps avoid tie votes that can slow things down. Too many members, however, can give rise to confusion, and the numbers may limit full participation in discussions. Generally the consensus is that the maximum should be held to around seven members, lest the committee become unmanageable.
Term limits. Where a sufficient pool of employees exists, it is advisable for membership to rotate. If terms of committee members are indefinite, there may be problems with complacency or an unwillingness to back away from prior decisions. Objectivity is a key component of a fiduciary's actions, and objectivity can suffer when prior decisions are up for review. Often people believe committee members are more likely to pay closer attention to what they are doing if they know others will succeed them and potentially review their actions.
Meeting frequency. Generally, the committee should meet at least once a year, although many people prefer quarterly meetings. Others argue that quarterly meetings may be too frequent and lead to short-term views on the performance of the investment classes. As noted above, the flexibility to meet more often to address financial challenges should be a part of the Investment Policay Statement (IPS).
Meeting agenda. Your IPS should be reviewed in each meeting to be sure it is current with the financial times and compliance environment. Changes should be made by the committee or suggested to whomever may be charged with assembling and maintaining the IPS.
Putting it in writing. Meeting attendance, discussions and any decisions that are reached should be recorded, along with their justifications. Once prepared, the record should be circulated to each committee member for verification of accuracy and for his or her endorsement. The record should also be made available to any others with responsibility for overseeing the investment committee. The reason for this broad dissemination of information is to make sure everyone with fiduciary investment duties is communicating with each other. Once circulated, the record should be filed for use by the committee, by another investment fiduciary or to defend the committee's actions, if necessary.
Because the makeup of the participants in any one plan varies so widely, taking a generic approach to creating and maintaining an IPS and investment committee for a plan is neither advisable nor in keeping with the good-faith fulfillment of ERISA's requirements. It should be noted that few universally right answers exist when it comes to the process of selecting investment choices for any given plan. See full story, located at InvestmentNews. (free registration may be required)
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Study Reveals Attitudes Play a Key Role in Participants' Deferral Rate Choices
A recent study by the Spectrem Group revealed some very interesting points about participant decision-making on deferral rates. Some of the highlights:
- The economy has not affected deferral rates. For the most part, they have not moved one way or the other from last year.
- 43% of the respondents do not think they are saving enough, with 62% of those with incomes under $50,000 agreeing. However, 28% of those with incomes over $75,000 also think they are not saving enough, so income is not the factor.
- Only about 15% of those eligible to make catch-up contributions are doing so, with over half of those not contributing because they cannot afford it. Fewer than one in five said they don't because they do not need to.
- Women are saving less than men (6.3% vs. 7.5%), yet are more concerned about having enough money to retire successfully.
Useful insights:
- The Employee Benefits Research Institute (EBRI) and other experts say Americans need to save 15% to 20% of their pay. Thus, on average, this group is saving about 1/3 of what they ideally should save.
- If a savings mentality can be instilled, participation and deferral rates should increase.
- If employers provide "personal finance 1A" and "investing 1A" classes and ongoing communications, two of the major issues surrounding not having the money to save due to poor budgeting/credit management, etc. and not being comfortable with investing, are mitigated. This change should also boost participation.
- Women have proven to be hungry for financial information and open to learning. Providing some financial training targeted specifically at the female population in your organization may help boost participation among that group.
See full story, located at NewsLink. |
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Questions or Comments?
Do you have a question or topic you would like addressed in our next issue?
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Horan Securities, Inc., doing business since 1996.
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