40% more at retirement? How? Reduce fees and increase performance by a combined 1.5% annually NOW.
Plan sponsors: please take notice - your decisions impact your own 401(k) account and your co-workers' accounts not by tens of thousands, but by hundreds of thousands of dollars
401(k) account holders: Speak up; it's your money!
Traditional 401(k) plans which make up 99% of the plans out there, typically have higher fees and lower performing actively managed retail mutual funds. We've covered these topics thoroughly in past e-newsletters including August 30, 2011 "Random Walk Down Wall Street". Click here for Newsletter Archive.
A study just came out last week saying that just getting investment advice alone in a 401k plan gives participants a 3% increase in average annual return, click here.
So let's be very conservative and assume that we would see a 1.5% percent average annual difference between a transparent-fee plan with advisor-designed passive portfolios compared to a traditional 401(k) plan with hidden fees, retail mutual funds and participants building their own portfolios. This 1.5% difference might be made up of, for example, 0.5% in fees and 1.0% in performance. This is a very reasonable assumption, but of course any prediction of the future must come with the caveat that we can't guarantee these assumptions will come true in any one year or years.
Let's say, you have $50K in your account now, add $5K/year over the next 30 years. One account net of fees earns 7.5%/year and the other earns 9%/year.
After 30 years, Account #1: $919,204
After 30 years, Account #2: $1,285,147. (40% Larger!)
The POWER of COMPOUNDING: A LITTLE increase in average annual growth COMPOUNDS into a MUCH LARGER account balance.
Fee transparency and investment advice are important because they result in higher average annual growth, a LARGER account balance and a BETTER LIFE IN RETIREMENT.
If you are working with an independent record-keeper that gets paid by the plan sponsor and NOT by the mutual fund company - you receive much higher quality service and they make the transition a BREEZE!
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Common Mistakes
Just because something is done a certain way by many doesn't mean there is not a better way. The biggest mistake we see is plan sponsors not taking a few moments to understand the difference in the status quo and a plan structure that includes an ERISA 3(38) advisor as we offer. The improvements are vast. When you move to a clean transparent plan that includes an ERISA Section 3(21) and 3(38) advisor - and eliminates 12b-1 fee paying mutual funds - then all the problems occurring inside 99% of the plans just disappear. Plan sponsors that have these type of "clean" plans will have a much easier time dealing with the 2012 regulations. Your fee disclosure to plan participants is simple, clean and reasonable. We encourage all plan sponsors to seriously consider upgrading their plans now. AVOID THE 2012 MESS!!! The new regulations are attempting to "legislate transparency" into 401(k) plans. Yet, "transparent plans" are available today and we provide them. Avoid the mess! It's completely unnecessary to subject yourself and your participants to it. This is not a one-time event - it's every year.
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What to Do Next
Problem Solved: Use an ERISA Section 3(21) independent advisor (RIA) that insists on bringing an ERISA Section 3(38) independent advisor (RIA) with them. They both have strict disclosure requirements built into their licensing so that complete transparency is the norm from day one. They'll be watching each other as well as the TPA, record-keeper and custodian, that are also independent. Multiple checks and balances - a fiduciary wouldn't have it any other way. Call us at 760-804-0910.
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