How to Improve

Your 401(k)

A Simple Roadmap

James Lorenzen, CFP�, AIF�

May 22, 2012
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Haven't benchmarked your service providers' fees and services against plans of similar size (# participants and asset level) receiving similar services? There are good reasons to do it now.

 

Assuming you participate in your 401(k) yourself it's your money, too! And, if you make decisions concerning your company's plan, you are a plan fiduciary - and that can have legal ramifications that are very real.

 

Want to make your plan better? Here are a few ideas you may want to consider to give you more control over both quality and costs while enhancing your plan's positive impact on participants:

 

Know Where You Stand

 

If you haven't benchmarked your plan recently, that should be your first step. And, frankly, if you haven't conducted an RFP in the last three years, if only to document your choice to continue with your current provider or negotiate better fees, you're overdue. Any fiduciary worth his/her salt knows this is critical.

 

Expand Your Horizons

 

Why be limited to a selected group of fund families simply because your provider has hidden compensation arrangements? Seek out an `open architecture' platform that provides access to the universe of mutual funds, including low cost no-load funds, index funds, and exchange-traded funds (ETFs). If your plan offers only a few fund families - or worse, requires a certain percentage to be invested in a particular fund family - you should be wondering why. If there's a compensation incentive to use funds that pay revenue sharing, that situation might represent a conflict of interest - Does that sound like a fiduciary standard to you?  It's important to fully understand your fiduciary responsibilities.

 

How about a line-up that pays no revenue sharing and provides no incentive for inclusion?

 

Here's a huge mistake many plans are making right now - check to see what share classes you're in. Are you in retail share classes when you could be in low cost institutional shares? The question has to be "Why?"   If the answer is "because they pay revenue sharing", you should see a huge red flag going up.

 

Limit the Confusion

Just because your plan now has access to the entire universe, that doesn't necessarily mean more is better. In fact, many studies suggest otherwise.   Why? It appears that often plan participation for salary deferrals is generally lower when participant-directed plans providing large fund menus. Participants can get confused with large fund menus. Do you really need three, four, or five mutual funds in each sector, i.e., large cap growth, mid-cap value, etc., when one or two choices, i.e., growth vs value, along with a low-cost index fund might do the trick just as well?  An open architecture recordkeeper allows you to screen the universe, while locating the fund(s) that might provide the most appropriate low cost choices.

 

Review Your Investment Selection Process

It doesn't matter if your plan is participant or trustee directed, the plan sponsor must review the investment selection process to make sure it complies with ERISA to limit liability. Frankly, this requires the retention of a plan consultant, development of an investment policy statement (IPS), selection and review of plan investments based on the IPS, documenting any decisions taken by the plan and employee investment education if the plan is participant directed.

 

Does your plan have an Investment Policy Statement (IPS)? Can you show it? Do the investment decisions you make align with your IPS?   You might be amazed at how many plans don't have an IPS, a plan consultant, or a review of investments to see it complies with the IPS. Too often, plan fiduciaries foolishly delegate this to their vendors believing - all too often erroneously - that the vendor is 'taking care of everything' for them.

Review Plan Fees & Services

This is a big one. It is a breach of a plan fiduciary's duty of prudence to pay fees that are unreasonable for plan administration and investments. It is required for plan sponsors to understand the fees that plan participants pay and determine whether those fees are reasonable for the services involved and what is available in the marketplace. Do you understand exactly what compensation is being received by each service provider from all sources?  The DOL even provides some help.

 

This past year, a Federal District Court here in California determined that a plan sponsor breached their duty of prudence by using retail share classes of mutual funds, when less expensive institutional share classes of the very same funds were available.

 

Plan costs have been an important discussion over the last few years because of the demands for required disclosure and because so many plan sponsors have been sued by participants for excessive fees.  And, plan sponsors now in insurance company group annuity contracts (GAC) should be especially vigilant. Insurance companies add wrap and other fees to the mutual fund expenses and shareholder servicing fees before the funds are 'unitized' for pricing. That's why there's no NAV pricing in these products and plan sponsors can often be blind-sided.

 

Is all revenue-sharing passed back to the plan? When all revenue sharing is passed back to the plan, all service providers must bill the plan directly on a fully-transparent basis. What happens to excess revenue sharing? Does it go back to the participants' individual accounts? No? Why not? Why are you overpaying and not getting overpayments credited back to your own account - you're a participant, too!

 

Remember, high fees aren't necessarily bad. Luxury and economy cars aren't priced the same; it's about what you're getting for what you're spending, whether the expenses are in the participants' best interests and help them meet their goals, and whether they are reasonable, which is not the same as customary.

 

Adding A Roth 401(k) Feature

The Roth 401(k) feature simply allows a participant to designate some or all of their deferrals on an after tax basis, allowing for tax free distributions at distribution if certain requirements are met. There should be no added cost to adding this feature (except for a plan amendment), it simply is an addition to an existing plan.  It's almost amazing that a majority of plans have yet to add this feature - it doesn't complicate plan compliance and participants should have the opportunity to decide whether to defer some or all of their salary deferrals as after-tax and enjoy that tax free growth. Also, the addition of a Roth 401(k) feature allows eligible plan participants (those older than 59 � or normal retirement age) to convert their pre-tax salary deferrals into Roth deferrals after taxes are paid.

Adding Automatic Enrollment

Some plan sponsors might balk at this feature, which defers a participant's income automatically if a participant fails to affirmatively waive participation in the salary deferral component of the plan - they're afraid of possible complaints.   According to industry conferences I've attended and much of the current literature, it appears quite a few ERISA attorneys believe this option is a smart move. And, it makes sense: Automatic enrollment makes a statement that the employer is interested in the welfare of their employees by having them set aside a portion of their income for retirement. It's about your corporate culture. If your employees believe you care about their future and you take the time to provide meaningful education, you'll find this will be a smart option to add.


Eliminate Eligibility Requirements for Salary deferrals

Here's another idea you won't like.   Immediate eligibility may increase plan costs because the plan may have multiple accounts sitting in the trust account belonging to former employees who quickly terminated employment after their date of hire. Nevertheless employers should understand that immediate eligibility for salary deferrals is an attractive employee recruitment and retention tool.  Let's face it, a one year of service eligibility requirement is strike against taking a job offer. Immediate eligibility for deferrals doesn't preclude the employee from having a year of service requirement for employer contributions and it won't affect discrimination testing on salary deferrals because under the otherwise excludible rule, testing will be completed as if the plan had an age 21 and a year of service requirement for salary deferrals. It can be easy to forget that a 401(k) plan is an actual employee benefit and immediate eligibility for salary deferrals is attractive for any employee, old or new.


Complete an Annual Review of the Plan


Just like an annual physical, it's necessary for your plan to stay healthy.   Too busy? That's no excuse; just ask the DOL. A 401(k) plan should be reviewed annually to determine whether the fees being charges are reasonable, whether the investments are still proper according to the IPS, whether the plan still fits the needs of the sponsor and participants. There are many financial advisors, TPAs, retirement plan consultants (including yours truly), and ERISA attorneys who can perform that service at a reasonable fee.

 

IFG Logo BoxAbout IFG 

The Independent Financial Group is a Registered Investment Advisor providing  retirement plan investment and fiduciary consulting to plan sponsors on a fee-only direct-payment basis.  IFG acts as our client's advocate in the financial marketplace, providing independent and non-conflicted guidance.  IFG does not sell products, earn commissions, or accept any third-party compensation or incentives of any description.  In adition to benchmarking, provider searches, investment due-diligence, and fiduciary services, IFG helps plan sponsors organize and maintain required documentation.

 

About Jim Lorenzen, CFP�, AIF

James Lorenzen is a CERTIFIED FINANCIAL PLANNER™ and an Accredited Investment Fiduciary�  in his 20th year of private practice with clients located in New York, Florida, Colorado, and California.   Jim has been a headline speaker on financial and organization development topics at more than 500 conventions throughout the United States, Canada, and the U.K.  His articles have appeared in more than thirty publications, including The Journal of Compensation and Benefits, The Profit Sharing Council of America's Insights, and The National Management Association's Manage.  He's also been interviewed on American Airlines' Sky Radio and by The Wall Street Journal for Smart Money magazine.  More about Jim here

Accredited Investment Fiduciary 

AIF and AIFA Designees have successfully completed a specialized program on investment

fiduciary standards of care. The curriculum is conducted by the Center for Fiduciary Studies in association with the Joseph M. Katz Graduate School of Business, University of Pittsburgh.  Created by Fi360, training began in 1999 to provide the investment industry with the first full-time training and research organization focused exclusively on investment fiduciary responsibility and portfolio management.  Designees are required to complete a rigorous training program, successfully pass an examination, conform to a code of ethics, and adhere to continuing education requirements on a yearly basis. These requirements ensure Designees are familiar with the prudent process developed by fi360, as well as kept up to date with recent industry events affecting fiduciaries.

 

 

About RPAGIFG-RPAG

In order to provide IFG clients with the highest standard of `best practices' and institutional-level services, while still maintaining a conflict-free independent environment.  IFG has retained Retirement Plan Advisory Group (RPAG) to serve as a `back-office' consulting and technology resource.   RPAG provides IFG with highly experienced `back office' of consultants and a state-of-the-art technology platform that support both IFG and plan sponsor clients. The RPAG network includes 350 member firms in 45 states serving approximately 20,000 retirement plans with $65 billion in assets. In short, everyone wins: This back-office support in design, ERISA issues, education, and technology allows The Independent Financial Group to provide institutional-level service without the conflicts of in-house product vending or hidden compensation arrangements.

 

 

About This Newsletter

Plan Sponsor Insights content represents the opion of the author.  Nothing contained in this material is intended to constitute legal, tax, securities, or investment advice, nor an opinion regarding the appropriateness of any investment to the individual reader.  The general information provided should not be acted upon without obtaining specific legal, tax, and investment advice from an appropriate licensed professional.