Minimum legal standard for 401(k) fund choices?

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Minimum legal standard for 401(k) fund choices?

Postby livesoft » Thu Dec 27, 2012 12:01 am

I don't think there is a minimum legal standard for 401(k) fund choices, but I wanted to ask anyways because my spouse has the following choices in her plan which I have previously mentioned. These are all and the only fund choices:

Code: Select all
Ticker e.r.   Name
FAIRX 1.01%   Fairholme Fund
SVBAX 1.16%   J Hancock Balanced Fund
SGENX 1.13%   First Eagle Global Fund
LSBRX 0.92%   Loomis Sayles Bond Fund
CSDAX 1.08%   Calvert Short Duration Income Fund
FDRXX 0.34%   Fidelity Cash Reserves
?????                Undefined, a stock picker does whatever they want (I called this the Madoff option,
                       there is no disclosure of what is going on with this option whatsoever)

In a company 401(k) meeting, the advisor (the "stock picker" mentioned for the Madoff option) said (paraphrasing) "If you aren't using the Madoff option, then just pick First Eagle for your stocks and Loomis for your bonds.

Has anybody got a 401(k) plan like this? If I was the fiduciary for this plan, I would have to quit or resign, but then again maybe it satisfies whatever the law (ERISA) says is needed. Does it?

Any comments?
It's all about short-term opportunistic rebalancing due to a short-term change in one's asset allocation, uh, I mean opportunistic rebalancing, uh I mean rebalancing, uh I mean market timing.
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Re: Minimum legal standard for 401(k) fund choices?

Postby JamesSFO » Thu Dec 27, 2012 12:19 am

I wouldn't feel warm and fuzzy about it but my sense in talking to people is that if they can tell a convincing story that they researched these funds and see that they have something resembling reasonable performance then they get off ok.

When I was replacing 401K plans at a startup, I had a broker wanting me to replace crappy funds with ones he would pick and how he would run the investment committee and protect us from liability. I went with Fidelity's standard small business plan with a mix of low ER funds across a broad range of asset classes and he kept telling me how we would be sued for not meeting our fiduciary duty.

Those sorts of scare tactics could discourage someone who isn't brave of heart from really digging into making a meaningful change.
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Re: Minimum legal standard for 401(k) fund choices?

Postby JamesSFO » Thu Dec 27, 2012 12:31 am

Dug a bit, the DOL "meeting your fiduciary responsibilities" page hints at pretty light regulations (http://www.dol.gov/ebsa/publications/fiduciaryresponsibility.html):

There are other ways to reduce possible liability. Some plans, such as most 401(k) and profit sharing plans, can be set up to give participants control over the investments in their accounts and limit a fiduciary’s liability for the investment decisions made by the participants. For participants to have control, they must be given the opportunity to choose from a broad range of investment alternatives. Under Labor Department regulations, there must be at least three different investment options so that employees can diversify investments within an investment category, such as through a mutual fund, and diversify among the investment alternatives offered. In addition, participants must be given sufficient information to make informed decisions about the options offered under the plan. Participants also must be allowed to give investment instructions at least once a quarter, and perhaps more often if the investment option is volatile.


Depending on the letter of the regulations perhaps there aren't enough choices in this 5-fund+Madoff plan?
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Re: Minimum legal standard for 401(k) fund choices?

Postby livesoft » Thu Dec 27, 2012 12:34 am

There are at least 3 different investment options in this 401(k).

Years ago, my 403(b) had only 2 options: CREF Stock and TIAA traditional annuity.
It's all about short-term opportunistic rebalancing due to a short-term change in one's asset allocation, uh, I mean opportunistic rebalancing, uh I mean rebalancing, uh I mean market timing.
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Re: Minimum legal standard for 401(k) fund choices?

Postby Cash » Thu Dec 27, 2012 10:37 am

This is truly atrocious. My company also has an "Unconstrained Themes" fund that lets the advisor (Wellington Capital Management) do whatever they want. It's also included in every target date fund. But at least there is a prospectus for it. And they also offer Vanguard's 500 and extended market funds. I use those and the self-directed-brokerage option to put together a decent portfolio. Is there a self-directed option for your wife's?
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Re: Minimum legal standard for 401(k) fund choices?

Postby ResNullius » Thu Dec 27, 2012 11:38 am

Before I left my firm at the end of 1999 and switched everything to Vanguard, my firm's options started as only one fund (a short-term bond fund), then the firm switched to a super expensive outfit that offered about 4 funds (all with huge expense ratios and upfront loads and really below average performacne), then the firm switched to BOA (everything there stunk to high heaven, plus cost a fortune), then the firm switched to a super expensive outfit (again with expensive funds and poor performance), then my partners revolted. About 5 years before I left, we actually had a merely expensive outfit that offered average to below average returns over a group of about 10 options. In short, during my working life, I had nothing but pure crap to select from. My taxable portfolio always was with Vanguard, so I know just how bad my firms choices were and how excessively expensive. The revolt was set off when a large group of partners withdrew their money, paid the taxes, then invested in a taxable account, with the explanation that they were better off doing that than staying with the firms tax-deferred choices. Bottom line: Many firms and corps have really, really bad retirement plans.
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Re: Minimum legal standard for 401(k) fund choices?

Postby Watty » Thu Dec 27, 2012 12:30 pm

In case you have not seen it check this wiki entry;

http://www.bogleheads.org/wiki/How_to_C ... tter_401(k)_Plan


What I find really odd about the bad plans is that upper management is usually in the same plan so it would be in their interest to have a better plan. If I was interviewing with a company that had that bad of a plan then I would have to wonder how well the company was managed.
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Re: Minimum legal standard for 401(k) fund choices?

Postby peppers » Thu Dec 27, 2012 12:55 pm

In globalmegacorp's 401k, there is a meme du jour fund. We like to call it HFL. Hedge Fund Lite.
"..the cavalry ain't comin' kid, you're on your own..."
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Re: Minimum legal standard for 401(k) fund choices?

Postby ResNullius » Thu Dec 27, 2012 1:33 pm

Watty wrote:In case you have not seen it check this wiki entry;

http://www.bogleheads.org/wiki/How_to_C ... tter_401(k)_Plan


What I find really odd about the bad plans is that upper management is usually in the same plan so it would be in their interest to have a better plan. If I was interviewing with a company that had that bad of a plan then I would have to wonder how well the company was managed.


The answer is: My firm wasn't well managed, which is why I left in 1999. I put up with it for as long as I could, since my options were limited in terms of changing places. The 401K disaster was nothing compared to the just plain bad business decisions that the firm made over the years. It cost me a bundle, but I finally gave up on trying to change things, and I left.
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Re: Minimum legal standard for 401(k) fund choices?

Postby dad2000 » Thu Dec 27, 2012 2:10 pm

I am on a 401K committee. Unfortunately, this type of fund selection is very common.

Someone (usually the employees) has to pay for the advisory fee and administrative expenses. From what I've seen, this usually amounts to 50-150bp for plans under $10M AUM.

Most people still chase after * ratings and know little about how costs correlate with performance, so it's a major uphill battle to affect change.
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