Hopefully it comes as no surprise that those who received investment advice, click here for article, got better results.
The trick is designing a plan that increases the likelihood that you will get help and/or a place your assets in a well-designed portfolio.
Some of the worst offenses I see are:
1) WAY TOO MANY CHOICES. You are more likely to make a mistake if there are more ways to make one! Generally, lots of choice is good in life, but not in 401(k) plans. Every time two funds overlap, diversification is lowered not increased.
Solution: Limit the choices to a small group of highly diversified non-overlapping funds with no style drift. This is very difficult to do in a typical 401(k) plan - but the situation can at least be improved.
2) "Stable value funds". Stable value funds are bad for several reasons. The biggest is that they allow panicked investors to act on their panic and get out of the market. I see firms with 14-18% of the total plan funds in "Stable Value". Many of those firm's participants will miss out on the growth of market and have less money at retirement. It's "time in the market" not timing the market that leads to growth. Stable Value mutes growth. Other reasons these are bad - they're proprietary - you can't see what's in them and likely have excessive fees - and fee arrangements that benefit providers and hurt participants.
3) Target date funds: Often these are expensive with hidden fees and none that we have seen are diversified as they should be. They do at least give some exposure to multiple asset classes. The other issue is these funds tie risk to an individual's age not to their ability to tolerate risk.
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Common Mistakes
Caveat Emptor - Let the Buyer Beware! The answer is simple: work with transparent structure/providers. Unbundled experts who each have a legally required loyalty to you. 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 the problems occurring inside 99% of the plans just disappear. 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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