401(k) - Employees who want a better plan need your advice.

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401(k) - Employees who want a better plan need your advice.

Postby fcirullo » Sun Mar 17, 2013 10:01 am

Even with the new fee disclosure rules, many owners, CEOs, and presidents still have a 401(k) plan that costs way more than it should. And it appears that they don't have a clue that plans that have a menu of managed mutual funds require more time to set up, manage, and monitor than a plan that has a menu of low cost index funds.

If you were a plan consultant, what advice would you give to plan sponsors? Perhaps your advice will help employees who want to campaign for a better 401(k) or 403(b) plan.
Frank R. Cirullo | | "It isn't what we don't know that gives us trouble, it's what we know that ain't so." -- | Will Rogers
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Re: 401(k) - Employees who want a better plan need your advi

Postby kmurp » Sun Mar 17, 2013 10:22 am

Our company uses active management because the fees (some of them) are refunded to the company to help defray the overhead of the plan. That is something that I don't think we can overcome.
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Re: 401(k) - Employees who want a better plan need your advi

Postby bberris » Sun Mar 17, 2013 11:03 am

Vote with your dollars. Only contribute enough to get the match. If there isn't a match save in a taxable account, or use an IRA if you can. If upper level employees want a plan, they will be unable to contribute because of the top-heavy rules.
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Re: 401(k) - Employees who want a better plan need your advi

Postby Clever_Username » Sun Mar 17, 2013 12:43 pm

bberris wrote:Vote with your dollars. Only contribute enough to get the match. If there isn't a match save in a taxable account, or use an IRA if you can. If upper level employees want a plan, they will be unable to contribute because of the top-heavy rules.


What's the cut-off for upper level employees? If I were upset at my employer's plan (I'm not), I think if I followed this, I'd end up helping it because I think I count as an upper level employee, if it goes by salary.

OP: have you checked out How to Campaign for a better 401(k) plan in the wiki?
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Re: 401(k) - Employees who want a better plan need your advi

Postby fcirullo » Sun Mar 17, 2013 1:04 pm

Clever_Username wrote:OP: have you checked out How to Campaign for a better 401(k) plan in the wiki?

Yes, isn't it great! Let's give a big round of applause for Pkcrafter, Blbarnitz, PiperWarrior, LadyGeek, and Hoppy08520 for their work on the article.
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Re: 401(k) - Employees who want a better plan need your advi

Postby livesoft » Sun Mar 17, 2013 1:25 pm

Clever_Username wrote:OP: have you checked out How to Campaign for a better 401(k) plan in the wiki?

I found that awfully funny. It's kinda like asking Rick Ferri if he had ever checked out "All About Asset Allocation" or asking William Bernstein if he had read "The Four Pillars of Investing". :)
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: 401(k) - Employees who want a better plan need your advi

Postby tfb » Sun Mar 17, 2013 2:11 pm

fcirullo wrote:If you were a plan consultant, what advice would you give to plan sponsors? Perhaps your advice will help employees who want to campaign for a better 401(k) or 403(b) plan.

Especially at a small company, I would show the owner that with a low cost plan, even if the company pays all the admin cost, the owner him/herself will be better off because he/she is currently paying so much out of his/her own account. At a larger company, I would show all employees are better off even if the company charges 100% of the admin cost in a low-cost plan to the plan assets. The plan would still be free to the company.
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Re: 401(k) - Employees who want a better plan need your advi

Postby lawman3966 » Sun Mar 17, 2013 2:47 pm

kmurp wrote:Our company uses active management because the fees (some of them) are refunded to the company to help defray the overhead of the plan. That is something that I don't think we can overcome.

The premise of your statement appears to be that the employer will necessarily pay the costs with a low-cost plan. To my knowledge, this is not the case. Nearly everything is flexible and can be adjusted, based on employer preferences.

My employer has a low-cost plan (pretty much the lowest cost plan I know of). The employer chose to have all administrative costs shared among the participants on what I believe to be an AUM basis (I'm not a partner and haven't seen all the paperwork yet). At the initial stages, when the account balances are low, the admin costs may amount to 1% or more of the AUM. However, unlike wrap fees and high ERs, these fees are fixed, and will thus represent a progressively lower percentage of assets, as the plan grows with additional employer contributions.

Thus, it's not a choice between high-cost plans that are beneficial to plan sponsors and low-cost plans that impose all admin costs on the sponsors. Arrangements can be made to address the interests of the sponsor, even with the low-cost plans.

The "bag of tricks" that high-fee plan salesmen use to lure sponsors into their plans only seems to grow as regulations require ever greater fee disclosure. The two I've seen most recently are (a) the promise of lower sponsor fees; and (b) the fear tactic of warning that lower-fee plans will cause the sponsors to be sued for bad market performance. To my knowledge, both are unfounded.
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Re: 401(k) - Employees who want a better plan need your advi

Postby livesoft » Sun Mar 17, 2013 3:08 pm

My spouse will never complain about her craptacular 401(k) plan. She does not want to "rock the boat".

So does anybody have any advice for employees who want a better plan but who won't communicate that desire to their employer?
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: 401(k) - Employees who want a better plan need your advi

Postby Angst » Sun Mar 17, 2013 3:26 pm

livesoft wrote:My spouse will never complain about her craptacular 401(k) plan. She does not want to "rock the boat".

So does anybody have any advice for employees who want a better plan but who won't communicate that desire to their employer?

Of course we've all noticed people on this board posting comments about horrible 401(k) plans, but they never mention the name of their employer. I can understand ones desire not to have their boss know they're publically making comments like this about the company's 401(k), but you have the ability to maintain a certain level of anonymity on a bb like this, so perhaps people should name their company when they post here. Might not public, searchable online comments at sites like this one have a way of getting back to the powers that be at one's company and potentially have a positive impact? What's the downside? Why does it seem no one ever mentions the name of their employer?
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Re: 401(k) - Employees who want a better plan need your advi

Postby SVT » Sun Mar 17, 2013 3:28 pm

Maybe contact Employee Fiduciary or whatever other desired provider to have them contact the company? I have thought about that as I also don't want to "rock the boat". We have Principal now and I just heard that my company is in the middle of switching to John Hancock! :annoyed
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Re: 401(k) - Employees who want a better plan need your advi

Postby KyleAAA » Sun Mar 17, 2013 3:39 pm

bberris wrote:Vote with your dollars. Only contribute enough to get the match. If there isn't a match save in a taxable account, or use an IRA if you can. If upper level employees want a plan, they will be unable to contribute because of the top-heavy rules.


Problem is, that approach hurts the employee far more than anybody else. It's not really a reasonable choice, which is why the whole 401k system has simply got to go.
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Re: 401(k) - Employees who want a better plan need your advi

Postby nisiprius » Sun Mar 17, 2013 4:02 pm

I will repeat once more. I don't know whether it will work for anyone else but it worked one for me. I was working at a company with about 200 employees. My employer's Fidelity-managed 401(k) plan had an OK stock index fund--Spartan 500 Index Fund, FUSEX--but no good bond fund.

I simply wrote a one-page letter to HR, saying that I preferred to mix my own stock/bond/cash allocation, that the plan didn't offer any suitable bond fund, and that I would like them to add one. I said that I was personally an index fund investor and that my personal choice would be Fidelity U. S. Bond Index Fund (FBIDX) (a BarCap aggregate fund with, then, about an 0.45% ER).

Next year, FBIDX was added to the available choices.

All I did was ask.

I didn't argue for the superiority of indexing or talk about low costs. HR may or may not understand investing, but they should understand "our employees have asked for it."
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Re: 401(k) - Employees who want a better plan need your advi

Postby fcirullo » Mon Mar 18, 2013 11:14 am

lawman3966 wrote: The "bag of tricks" that high-fee plan salesmen use to lure sponsors into their plans only seems to grow as regulations require ever greater fee disclosure. The two I've seen most recently are (a) the promise of lower sponsor fees; and (b) the fear tactic of warning that lower-fee plans will cause the sponsors to be sued for bad market performance. To my knowledge, both are unfounded.

Isn't it amazing how no law, rule, or regulation ever seems to slow that kind of sales person down! Here is what the DOL and Employee Benefits Security Administration have to say about being a fiduciary for a plan: "A fiduciary should be aware of others who serve as fiduciaries to the same plan, because all fiduciaries have potential liability for the actions of their co-fiduciaries. For example, if a fiduciary knowingly participates in another fiduciary’s breach of responsibility, conceals the breach, or does not act to correct it, that fiduciary is liable as well." http://www.dol.gov/ebsa/publications/fi ... ility.html

By setting up a low cost plan that has a menu of index funds, you reduce your risk of being sued. For instance, no one will sue you for wanting to match the market's performance less your cost for the index funds.
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Re: 401(k) - Employees who want a better plan need your advi

Postby bUU » Mon Mar 18, 2013 11:58 am

By the same token, those that know the tricks to remain firmly compliance with minimum cost will be rewarded by clients who care more about keeping up the appearance of decent benefits rather than the actuality of decent benefits. It isn't hard to craft a firmly compliant (and not coincidentally low-cost-the-the-employer) plan that is still "crap" for the employees.
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Re: 401(k) - Employees who want a better plan need your advi

Postby fcirullo » Mon Mar 18, 2013 12:06 pm

SVT wrote:Maybe contact Employee Fiduciary or whatever other desired provider to have them contact the company? I have thought about that as I also don't want to "rock the boat".

Your idea is worth trying because every business needs to prospect for new customers. Ask Employee Fiduciary, Fidelity, Vanguard, and/or The Online 401(k) if they are interested in leads, and let us know which of them actually follows up on your lead.
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Re: 401(k) - Employees who want a better plan need your advi

Postby Clever_Username » Mon Mar 18, 2013 12:36 pm

livesoft wrote:
Clever_Username wrote:OP: have you checked out How to Campaign for a better 401(k) plan in the wiki?

I found that awfully funny. It's kinda like asking Rick Ferri if he had ever checked out "All About Asset Allocation" or asking William Bernstein if he had read "The Four Pillars of Investing". :)


:shock: Oops. I thought it was someone who was trying to get an improved 401(k) plan asking for advice. I should learn to pay more attention to who I'm responding to.

At least I entertained some people. Sorry OP.
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Re: 401(k) - Employees who want a better plan need your advi

Postby englishgirl » Mon Mar 18, 2013 12:56 pm

I'm an employee who wants a better plan, and still don't know what to do, so I don't think I'm qualified to give advice to plan sponsors.

Maybe tell them to take some time to figure out what is good for both the employer AND employee? I think basically the CEO or CFO or whoever thinks it is going to be difficult and time-consuming and just gets sold a plan without understanding what is going on. I'd think if you could educate them quickly and easily on the costs of the crappy plans to both them and their employees, you'd have a chance of switching them to a better one.

As far as my own 401(k) goes:

I have asked for an additional fund. And was told no, but a very similar fund miraculously appeared about a year later, after their "regular review" of the plan. So I count that as a win anyway.

But since the fee disclosure rules came out, I have been asking for an explanation of an additional "fund expense" fee that appears in my account at random intervals. I am now being ignored. I continue to email HR every time a new fee pops up, but my emails are apparently going into the file marked "problem employees" or direct to trash, instead of being responded to. Hey ho.
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Re: 401(k) - Employees who want a better plan need your advi

Postby graveday » Mon Mar 18, 2013 1:29 pm

As someone who suffered from crappy 403b offerings, I urge to visit whoever oversees the plan and ask what can be done. As nisi says, it is also good to put it in writing.
I found that it is not easy for, say a school district, to put together a list of offerings on their own. There are protocols and procedures to be followed. To get Vanguard in their list seemed impossible. Yet such flack crap as Valic was. In fact, Valic reps and even private 'financial advisors' for load funds would regularly arrive at your classroom door to sign you up for payroll deduction plans. It was payroll deduction alright.
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Re: 401(k) - Employees who want a better plan need your advi

Postby leonard » Mon Mar 18, 2013 3:01 pm

A good 401k plan drastically increases plan sponsors' ROI in the business. So, appeal to the plan sponsors economic self interests.

Plan sponsors generally have high balances in the 401k. So, they loose the most when expenses are high. It is relatively easy to quantify that additional loss to high expenses and show sponsors how much they are losing personally through high expenses.

Making very conservative assumptions, I have shown owners and plan sponsors could easily have an extra 500 to 750k at retirement by lowering expenses in a high cost plan. Very easily. In fact the number could easily go over a $1M.
Leonard | | Market Timing: Do you seriously think you can predict the future? What else do the voices tell you? | | If employees weren't taking jobs with bad 401k's, bad 401k's wouldn't exist.
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Re: 401(k) - Employees who want a better plan need your advi

Postby bUU » Tue Mar 19, 2013 6:33 am

Unfortunately, the plan sponsors where I work aren't the people who allocate budget for expenses for the plan; those that hold the purse strings don't even work in the US.
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Re: 401(k) - Employees who want a better plan need your advi

Postby fcirullo » Thu Mar 21, 2013 10:50 am

Thank you for your ideas...they will be helpful to employees and employers who want a better 401(k) or 403(b) plan. Please continue to post any other ideas that you may think of because this thread has now been linked to the following wiki articles.

Wiki article link: How to Campaign for a Better 401(k) Plan

Wiki article link: Setting up a 401(k) plan

Note - You can find the link under Forum discussions.
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Re: 401(k) - Employees who want a better plan need your advi

Postby Beelzebozo » Sun Mar 24, 2013 5:35 am

This post is long but meant to be a detailed guide for plan sponsors and participants. In the future I'll see what I can do about getting a full wiki guide. I will divide this response into two sections: 1) Suggestions for Plan Sponsors and 2) Methods of Action for Participants. Participants may want to relay the contents of (1) in their appeals to their company's Investment Committee. Rephrasing for tactfulness is advised.


1) Key Issues to Consider for Plan Sponsors


Pricing
The retirement plan industry is in the midst of the largest change since the advent of the 401(k) due to the new 408(b)(2) Plan Level and 404(a)(5) Participant Level disclosures. I liken it to watching a bunch of roaches in a New York apartment scatter when you turn on the light. They have been getting away with charging excessive fees for a very long time because they were either not disclosed or impossible to decipher. In many instances, the disclosures are only helpful for a professional who know what to look for and where the bodies are buried.

The best thing that a plan sponsor to do for their plan right now is to do a Comprehensive Request For Proposal process. So much has changed since even June of last year that I would suggest considering it even if you recently did an RFP. Also, the last RFP was likely done wrong. In order to get the best pricing, you have to FORCE plan providers to provide you with a quote that is transparent. The way to do this is to ask for their "Required Revenue Number" and tell them to assume an all Vanguard lineup. This doesn't necessarily mean you have to use all Vanguard funds (not a bad idea, as I will discuss below), but it makes sure that no "revenue sharing" is embedded in the expense ratios of the funds. Get quotes from numerous different providers and put them on a matrix to compare them. If you received the "Required Revenue Number" you should be able to isolate the Recordkeeping & Admin costs and do an apples to apples comparison. Then, GO BACK to the top 3 providers you are considering and ask them to improve their bid. Tell them you know they've got room to budge and it would help them look better compared to the competition. If they refuse to lower their costs and give you fluff about how they're the greatest thing since sliced bread, make them explicitly repeat the following words back to you "We refuse to lower the proposed costs for this plan". After selecting three finalists, have the whole committee meet with them (30-60 minutes apiece), preferably on the same day. Vote on who you think is the best and then GO BACK TO THEM AGAIN and ask for a little bit more of a discount to push it over the edge. I specialize in this process and it's easier said than done. However, the key point is that the vast majority of plans in this nation can save money, even if they stay with the current provider. That's why the DOL passed new regulations, because the average costs are too high. That's why you should never benchmark your plan's cost to an average, because most people are getting screwed. Doing an RFP as outlined above, even if you don't do finals presentations and just use the bids to squeeze your current provider, will result in savings. I have seen a plethora of plans from a variety of plan providers & demographics and there is very little chance that your plan is competitive. And don't think that your plan is too small. Any plan over $1MM can be completely transparent, get great service, and doesn't have to be stuck with a costly annuity or complicated revenue sharing.


The Truth About Plan Providers
The industry is rapidly changing and a lot of people are used to doing things the old way. Nevertheless, the era of transparency is here and some companies have more or less embraced it. However not everyone at these companies is used to designing transparent plans. It's up to plan sponsors to know what providers are out there and how to use the platforms they have appropriately.

As mentioned above, only evaluate providers that are capable of providing an "open-architecture" platform with over 3500 funds & screen out all others. After that has been done, the issue of available investments and investment selection is almost entirely irrelevant. That's because I can get pretty much the same lineup at all of those vendors. This means that I can get an all Vanguard lineup at Fidelity, Putnam, Schwab, Prudential, Great West, or anywhere. Even if the company makes their own funds like Fidelity, you have absolutely no proprietary requirements on the open platform (but they will try to encourage you to use them so watch out). The implication of this is that you have to evaluate vendors on other metrics such as their participant resources, customer service, communication campaigns, reliability, etc.


Just a Few Providers to Consider
Plan Providers with Open Architecture for Plans Under $1MM: Employee Fiduciary, Ascensus/Vanguard, The Online 401(k) - In this market these three players are exceptional value and the most reputable places to get open architecture

Plan Providers with Open Architecture for Plans Over $1MM: Once you get over $1MM options open up big time. Here's just a brief list of providers to consider

Putnam - Has some of the top technology and great financial planning resources for participants
Fidelity - The big name everyone knows, good all arounder
ADP - Interesting payroll integration tools & flat pricing based on the number of participants
Great West - Very competitive pricing
Third Party Administrator & Recordkeeper - Many local TPAs can do recordkeeping as well and a big firm like TD Ameritrade will custody the assets & provide the investment platform. May be appropriate for folks who want a locally based firm.

Plan Providers with Open Architecture for Plans Over $10 MM - Even more choices open up with more features. After $20MM almost everyone can do open architecture.

Transamerica (previously Diversified) - Completely separate division that bears no resemblance to the annuity based plans at lower asset levels
MassMutual
Prudential
New York Life
Schwab - Full service platform >$20MM
Vanguard - Proprietary platform is not universally available until over $50MM

A Quick Note on Vanguard
Members of this forum will certainly be aware of Vanguards exceptional qualities when it comes to fund management. However, these qualities DO NOT are irrelevant to the retirement plan recordkeeping & administration world. There is no correlation. For plans under $20MM, they subcontract all the work to a company named Ascensus. Ascensus is price competitive in many situations depending on demographics. They are known as a bare bones provider and not as high service as other places. They're good, transparent, & cheap but not one size fits all. For plans over $20MM it is possible to get Vanguard's proprietary institutional platform. This platform is not cheap by any means, not matter what they tell you. Oftentimes you can get the exact same Vanguard funds with substantially cheaper recordkeeping & admin from another provider. That's not to say that they are bad, but be aware they are not the low-cost provider in that market space.

Remember, just because you have one of the providers above does not mean your plan is good. Like any tool, it can be used improperly so it's important to reevaluate your plan to make sure it's transparent & cost competitive. Many of them have plans established many moons ago that are criminally overpriced. In most cases all you have to do is ask and they'll drop the fees with no argument.


Providers to Watch Out For - This list is by no means exhaustive
Mutual of America - Major player in nonprofit space, extremely expensive & inflexible annuity based plan. You can probably save thousands of dollars by switching if you have >$1MM
ING - One of the most notorious for unforgiving pricing; can be in the realm of reasonable over $20M.
Hartford - Just bought by MassMutual, generally uncompetitive, does have a mutual fund platform but it's packed with revenue sharing
Hancock - Similar to above. They rarely make less than .50% on plan
VALIC - Known for their costly annuity plans, they do now have an open architecture platform. If you have an annuity plan with them, look at transferring to their mutual fund based platform as soon as possible. It's not cheap but typically will waive the annuity surrender charges if you stay there for a year.
Paychex - Use their payroll connections to cross-sell costly mutual fund-based plans; small market focus
American Funds - Sorely out of date, most plans have proprietary fund requirement


Investments & Revenue Sharing
I discussed revenue sharing a little bit above but will elaborate on it here. Revenue sharing is when some of the money collected through a fund's expense ratio is kicked back to the Recordkeeper/Admin or the Broker/Advisor. Revenue sharing is the way of the past. It's a way to make fees more obscure and inflexible. Don't do it. Recordkeepers & Administrators have to get paid but make them tell you how much up front. The fee can be billed to the company or to participant accounts but they should only get money from one source. The way of the future is to use Institutional mutual funds that contain no revenue sharing (Vanguard funds contain no revenue sharing but they do have cheaper versions for retirement plans called Signal, Admiral, & Institutional depending on the fund. Always ask to see if you qualify).

Using index funds is not only great for eliminating revenue sharing, but also for reducing fiduciary liability. To my knowledge nobody has been sued yet for using index funds. People have been sued for using funds with excessive cost however. There is extensive evidence that one can use to justify implementing a lineup composed entirely of index funds. Having an Investment Policy Statement is a way to do this and is considered a best practice. If you write yours to specifically explain why you believe using index funds is prudent, then your ass is covered. Furthermore, you don't have to spend money or time hiring a third party or reviewing investment performance yourself. Just make sure the tracking error is acceptable and you have demonstrated a "Prudent Process".

If for some reason you refuse to offer an all index lineup, then you should consider at least offering indexes in the following categories for participants who want to index: Large, Mid, & Small Cap Blend, Foreign Large Blend, Diversified Emerging Markets, Intermediate-Term Bond.

Key Note: The DOL will not hold you responsible for investment performance. They are concerned whether you have a prudent process for making decisions. Documentation is very important.

On a related note to revenue sharing, there is the issue of Net Asset Value plans (Mutual Funds) vs Group Variable Annuity (Insurance Based) plans. The long & short of it is that there's no reason to have an annuity plan if your plan's assets are over $1M. There is absolutely no advantage to an annuity plan. Annuity plans simply allow for more complex forms of revenue sharing and less transparency. They're also typically more expensive than necessary. Examples include John Hancock & Mutual of America (always), ING, Hartford (Now a subdivision of MassMutual), VALIC, Transamerica, Nationwide, and Great West (sometimes).


Investment Selection
Crafting a prudent investment lineup is not as hard as it's made out to be. Consider offering only funds from the following asset classes & styles. As mentioned above, you can't go wrong with an all index lineup. No matter what your fund choices, make sure you are getting the cheapest share class available.

Easy Buttons - Meant for the less investment-savvy participant. There's numerous reasons to consider orienting plan communication materials & enrollment kits into subtly guiding people towards these options.

-Risk-Based Asset Allocation Funds aka LifeStyle Funds - This is a one fund portfolio geared towards a participant's risk tolerance (Conservative, Moderate, Aggressive, & variations thereof. These have many advantages over Target Date funds like:
-- They maintain the same risk profile over time. This allows participants to change their risk level when they want to, not some arbitrary date.
--Because of this they're easier to understand & more flexible. Some younger participants may be conservative & therefore the 2050 fund is inappropriate for them. Likewise for aggressive investors in their 50s. Calculating which Target Date fund to use if you don't have the given risk tolerance that fund says you should have is beyond the average participant.
-- They are easier to compare from fund family to family. Comparing the glide paths of different types of target dates against each other gets complicated real quick. Not for the faint of heart.
-- There's arguably less fiduciary liability. There were many lawsuits against fund companies by people about to retire who were invested in 2010 target date funds when the market crashed in 2008. This is because some of those funds had 70% in stocks and got hammered. They thought the name "Retire at 2010" meant they would be less risky. An Aggressive Allocation fund has the word "aggressive" in it. Much less room for confusion.

Target Date funds - The other option. Better than no easy button at all.

Equity
- The 9 Style Boxes - Large, Mid, & Small Cap funds in Growth, Blend, & Value
- Foreign Large Blend
- Foreign Small/Mid Blend (lower priority)
- Diversified Emerging Markets

Fixed Income
- Intermediate-Term or Total Bond
- High Yield Bond
- Inflation-Protected Bond
- Short-Term Bond
- Long-Term Bond (lower priority)
- International Bond

Alternatives (Special Mentions, you can easily get by without)
- Real Estate (lower priority)
- Natural Resources/Commodities (Optional - Not appropriate for all plans)
- Precious metals (Optional - Not appropriate for all plans)

Stable Value/Cash
- Stable Value Fund or Fixed Account - You should strongly consider using a stable value fund or the fixed account of your plan provider. Money markets are yielding nothing and likely to continue to do so for the foreseeable future. Stable value is for more long term investment for extremely conservative investors as opposed to a money market which is for when more liquidity is desirable. Because of the nature of a 401(k), liquidity is not a concern. Stable value funds are netting between 1.4% & 2.2% these days. Multiply that by the thousands or millions of dollars in your plan's cash position and you will get an idea of the huge bucket of money you're leaving on the table.
- Furthermore, many money market funds have a NEGATIVE RETURN. Sometimes this is due to management but it's normally because of excessive fees. This is a huge fiduciary breach because you are guaranteeing participants a loss in the one place where they put their money when they want to preserve principal first & foremost.
- Note: Stable Value funds are unique to the qualified plan universe & unavailable to retail investors.


Plan Design
Consider the following plan design features if you do not have them. Most are free to add to the plan and can provide substantial value to participants. Some of them have only been available for the past few years so check your plan document. For specific advice consult a good Third Party Administrator or a 3(21) or 3(38) third party fiduciary.

- Auto-enrollment - There's stacks of papers on behavioral finance and how great people are procrastinating. This makes sure that people don't let years of saving go by while saying "I'll get around to it"
- Qualified Automatic Contribution Arrangement (QACA) aka Auto-Escalate, Save More Tomorrow - A newer tool that allows participants to set when their contribution amounts will increase. Can be timed to coincide with whenever a raise happens. Lets participants start off deferring 3% and work their way up to 10% or more.
- Self-Directed Brokerage Account - Helps satisfy all us Bogleheads who want more options. Allows you to have a lean and mean designated fund lineup but still accommodate the "do it yourself-ers"
- Roth contributions - Super easy and extremely useful for tax diversification purposes. No reason not to add.
- In-service withdrawals at 59 1/2 - Lets people about to retire pull out some funds for life expenses. Really easy to add & use.
- Forceouts for terminated employees w/ balances under $5000 -This makes admin easier and helps keep your plan's pricing competitive. Why pay to recordkeep & admin people with barely any money who you don't employ any more?
- Eliminate or severely limit plan loans - One of the top bad decisions participants make. No employee asks about plan loans when evaluating the quality of the plan.
- 25% Match - This one is much less universal but there is good evidence that a smaller match (ie 25% up to 12% of salary) is much more effective in enticing savings than a larger one (1% up to 3% of salary). This is because many people contribute the minimum they can to take FULL advantage of the company match. Raise the bar, raise the contributions, keep the cost to the company the same.
- Don't bother offering a "portfolio management service" or anything else that charges a percentage of assets to pick which funds participants should invest in. That's what your easy button options are for. This is different from a phone center or education/enrollment mtg.


Plan Governance
- No matter how small your plan is you need to follow fiduciary best practices. This means regular meetings that are documented (even if you don't currently have a committee, someone is making decisions) You should have a committee with an odd number of members that takes & records votes.
- While complicated, this stuff isn't that hard. Do your due diligence and then MAKE A DECISION. Waiting until next quarter, year, or century is not advisable. Just get people in a room, talk about the issues, then vote. It's disgusting how much money I've seen people piss away while waiting to do something they "haven't gotten around to it".
- ERISA (the law that governs 401(k) plans) requires Plan Sponsors to act "for the exclusive benefit of the participant and their beneficiaries". Known as the Exclusive Benefit Rule, this means you can't take anything else into account but the welfare of the plan when making decisions. That means that you can't do certain things because they're in the best interest of the corporate entity, not the participants. Examples include:
- Hiring a payroll company to do your 401(k) even though they are quite costly,
- Hiring a bank to be the plan provider because they gave the company a great loan rate
- Hiring an investment firm to advise the plan because they handle certain other business for the finance department
- Hiring an advisor because they're the CFO's personal advisor
- Hiring an advisor or other service provider because they have a buddy buddy relationship with a decision maker
- Continuing to overpay an advisor/service provider because of a handshake agreement made by the long decease owner of the company

The bottom line is that IT'S NOT THE COMPANY'S MONEY. It's not a tool that should be used for negotiating other things. That money belongs to participants and the law & basic ethics hold you responsible for acting in their best interests.


Miscellaneous Guidance
- Your audit (for plans >100 eligible participants) should not cost over $10,000. Full stop.
- Determining the full costs of your current plan and parsing out how much each service provider gets is very difficult. Typically it can be accomplished with a Current Asset Statement (list of money in each fund) and the 408(b)(2) Plan Level Disclosures from every service provider. However there can be problems with accuracy & completeness of the information. DIY is not recommended. I wish I could be specific but all I can say is find someone with experience who knows what they're doing and has no vested interest in the outcome.
- Your broker/advisor is likely legally on the hook for much less than you think. They're also probably overpaid just like everyone else. Advisor conflicts of interest, fiduciary responsibility, & competence is a full discussion in and of itself. Just remember they should not be exempt from your price squeezing & renegotiation efforts.
- Fun Fact: Mutual funds don't include trading costs in their disclosed expense ratio, nor in any other disclosure to plan sponsors. This means that an extra 1% can be siphoned out of your returns without you knowing. This is the least-known and hardest-to-calculate fee in the entire industry.
- The industry is going through an upheaval and there are varying levels of competence, integrity, and acceptance of the paradigm of transparency. Be aware that doing the right thing may earn you some scorn.


Methods of Action for Participants

- Writing a letter is always a good first course of action. Having three or more people send/sign the letter is much more likely to generate a response. Depending on your desire level of involvement you can ask for:
-- Additional index fund choices
-- The opportunity to sit in on the next investment committee meeting
-- If you want to know the total costs of the plan, ask for the 408(b)(2) Plan Level Disclosures. Bringing this to an independent consultant can help you figure out if you're getting screwed.

- If you can't get your company to take the issue seriously, write a letter to the Department of Labor's Employee Benefits Security Administration. They take complaints VERY seriously. There's nothing like a DOL investigation to perk people up to their fiduciary responsibilities. They're good about anonymity as well.


Summary

The information should give you a leg up in ensuring that your plan is transparent, cost-competitive, and solid from a fiduciary perspective. The important thing for plan sponsors is to be proactive about addressing these issues and to not take advice from anyone with a conflict of interest. There's many pitfalls but I hope I've helped you avoid the biggest ones.


Forum Responses

Echoing some of the points in previous posts:

Lawman3966 - You are correct that the "bag of tricks" is dark and deep. Not only are there a sickening amount unscrupulous people in the industry, but there are also people who have been brainwashed to sincerely believe in doing things the wrong way. Always remember that there are no coincidences: many things can be either traced back to a conflict of interest or bad decision.

Frank - +1 on reducing liability through indexing. I'm in the business of lowering cost and reducing fiduciary risk and this is a great way to do it. Unfortunately it's the one that most often goes unsaid!

nisprius & englishgirl- +1 Asking does wonders. Also, one person asking is a pain, two a coincidence, three a movement. Finding two buddies at lunch to forward the same letter can significantly impact chances of action.

graveday - +100 Government entity 403(b)s are among the worst cases out there. Coincidentally, many of them don't have to comply with new disclosure rules! Fixing such a situation would require more words than I've written and more dollars than VALIC has overcharged.


Disputing earlier points:

bberris - Voting with your feet is stupid. I can assure you that the people in charge of the plan will hardly notice or care unless it's on a mass scale. If you can organize large scale action to leave the plan, you can organize large scale action to fix it.

kmurp - The choice between active & passive management is independent of revenue sharing kickbacks. There are active management funds with no revenue sharing and indexes with fees tacked on to cover cost of recordkeeping & admin. While this makes the fund more expensive than the fund you can get elsewhere, the additional fee is only for RK & Admin. You're still saving on fund management costs. Eg. an index w/ .15% expense and a .25% fee on top is still cheaper than a 1.00% fund that is kicking off .25% in revenue sharing. There's a .60% difference in the cost to pay people in NY to manage the fund.

Clever_Username - If you're close to being an upper level employee, you would generate more results by using your seniority to lobby for change.

bUU - Not disputing but adding: You would be amazed at the amount of plan sponsors who are concerned with being "in compliance" but don't care about costs. People who you'd think want cheap & dirty often get expensive and dirty.


Disclosure: I work within the retirement plan industry and over just the past year have analyzed more plans than almost anyone in the nation. I am an Investment Advisor Representative of a fee-only Registered Investment Advisory firm and receive no compensation from plan providers nor investment companies. This post is for education purposes only and should in no way be considered investment advice or a solicitation of business.
Last edited by Beelzebozo on Sun Mar 24, 2013 9:47 pm, edited 1 time in total.
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Re: 401(k) - Employees who want a better plan need your advi

Postby graveday » Sun Mar 24, 2013 11:10 am

Beezlebozo, thank you for the exhaustive insight. The most irritating and infuriating thing about 403b offerings is that they rip off teachers and nurses especially, people who serve. The VALIC predators and the financial sharks offering only load programs that lock victims in with fee structures I would like to meet in a very dark alley.
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Re: 401(k) - Employees who want a better plan need your advi

Postby Epsilon Delta » Sun Mar 24, 2013 5:43 pm

Beezlebozo:

Perhaps you should expand on what "Required Revenue Number" is. You say it's important but don't say what it is, or how to evaluate the bids. I can't even gather whether high or low is good. :)

This is theoretical for me at the moment, although I do appreciate the information and may have to put it to use in the future.
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Re: 401(k) - Employees who want a better plan need your advi

Postby Beelzebozo » Sun Mar 24, 2013 7:19 pm

The "Required Revenue Number" for a plan provider is simply the total number of dollars they need to get paid for the services being offered. It's the "How Much?" component of the proposal, completely independent of the "How is it being billed?" part. A provider may quote this to you in hard dollar form, a per-participant number, or as a percentage of assets. However they do it, it should be just one number. Consider translating all Required Revenue Numbers into a percentage of assets so for an apples-to-apples comparison across quotes. Even if you get a transparent fee schedule, calculate the total costs as a percentage of assets for comparison purposes.

Most plan providers will not give you this number right off the bat. You have to ask them for it. Some providers like ADP will usually give you a base fee and a per-participant fee which is easy enough to translate. Similar situation with Employee Fiduciary. Others like Fidelity, Great West, Putnam, & others can give it to in a % of assets you but you have to ask.

The point of getting the required revenue number is so that you can see the total costs in one figure. Comparing a jumble of base cost, per part, custody, admin, revenue sharing, & more makes things more confusing than they need be. It reduces transparency so you don't know if what you're paying is reasonable.


Disclosure: I work within the retirement plan industry and over just the past year have analyzed more plans than almost anyone in the nation. I am an Investment Advisor Representative of a fee-only Registered Investment Advisory firm and receive no compensation from plan providers nor investment companies. This post is for education purposes only and should in no way be considered investment advice or a solicitation of business.
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