A Review of Employee Fiduciary's 401(k)

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A Review of Employee Fiduciary's 401(k)

Postby Dan Kohn » Thu Dec 27, 2007 5:06 pm

I've recently completed the process of moving my company's 401(K) plan from the extremely high-fee John Hancock to Employee Fiduciary (EF), which offers the lowest cost 401(k) plan available to small businesses. I thought other Bogleheads might be interested in a quick review of the switch and my opinions. In summary, I've been extremely pleased with EF and would highly recommend them to any company unable to work with Vanguard directly (i.e., with less than $3 M in assets). Even above $3 M, I believe EF's fees are still less than Vanguard's for many companies.

In my opinion, the 401(K) industry as a whole does an extremely good job of fleecing individual investors by (in many cases) overcharging for mediocre funds. I think EF is the best alternative to that for small companies because they have no conflict of interest from being paid kickbacks to carry specific funds. They let you choose any fund you want for your plan and offer solid customer service and extremely low fees. They charge $25 per employee with a minimum of $1500.

The funds we chose to offer our employees (with fees) are:

VG S&P 500 (VFINX) [0.18]
VG Extended Index (VEXMX) [0.25]
TIAA-CREF International Index (TCIEX) [0.15]
VG Int. Treasury (VFITX) [0.26]
VG Total Bond (VBMFX) [0.20]
VG Money Market (VMMXX) [0.24]
VG Target Retirement Income - 2050 [~0.20]

Here are some details on our plan (as I presented them to our employees). My minor critiques are at the bottom.

Q. John Hancock offered over 60 funds. Why are there only 6 mutual funds and 11 target retirement funds?

A. Our new 401(k) plan is modeled on the Federal Government's Thrift Savings Plan, which is the largest defined contribution plan in the world and one of the very best. Although we can't offer the rock bottom fees of the TSP, our plan has the lowest fees available for any small business. Since fees are subtracted directly from your investment return, this means more money for your retirement. More info on the TSP is available from Money Magazine and the TSP website.

All of the funds in the 401(k) plan are index funds. This article has a good background on index funds. Note that if you wish to invest in more exotic assets or actively managed funds, you can still do so in an IRA or a taxable account.

Q. How can I learn more about the funds available?

A. When you log into the website and choose Investment Profiles, each fund name is a link to the Morningstar report on the fund. Morningstar shows the fund's performance, fees and a lot of other information. If you want to read Morningstar's analysis of the funds, you can sign up for their 14 day free trial. But I'll ruin the suspense and let you know that they rate all of the funds very highly.

Another great source of information, including links to the prospectuses for the funds, is the Vanguard website. The funds the plan invests in are the regular Vanguard investor shares.

Here is information on the TIAA-CREF International Index.

Q. What plan should I sign up for?

A. Acting under guidelines from the 2006 Pension Act, we officially recommend that if you're not sure what investment to choose, you seriously consider a Target Retirement plan. They have a number of advantages:

1. Diversified portfolios designed by Vanguard experts.
2. Eleven different choices, to match your planned retirement, or to choose a more or less aggressive asset allocation, if you wish.
3. No need to rebalance, as Vanguard does it for you every quarter.
4. Stock/bond allocation grows more conservative with age.
5. Simple to understand and maintain.

We will be automatically enrolling new employees in the age appropriate Target Retirement fund unless they choose a different asset allocation or explicitly opt out. But we need current plan participants to choose their funds explicitly.

Q. Which Target Retirement fund should I choose?

A. According to Vanguard, these funds are best at the following ages:

Fund Name Your Current Age Years to Retirement
TR 2050 Fund 18–23 About 45
TR 2045 Fund 24–28 About 40
TR 2040 Fund 29–33 About 35
TR 2035 Fund 34–38 About 30
TR 2030 Fund 39–43 About 25
TR 2025 Fund 44–48 About 20
TR 2020 Fund 49–53 About 15
TR 2015 Fund 54–58 About 10
TR 2005 Fund 64–69 About 1–5
TR Income Fund In retirement In retirement

Q. Why do you use the TIAA Cref International (TCIEX) fund instead of Vanguard's Developed Markets (VDMIX)?

A. Both the TIAA-CREF and Vanguard are index funds that track the EAFE index of European and Pacific stocks, so their returns should be (and have been) nearly identical. However, the Vanguard fund charges a redemption fee of 2% if held for less than 2 months, in order to discourage frequent trading. The TIAA-CREF fund does not have this limitation. Also, the Vanguard fund has an expense ratio of 0.22%, while the TIAA-CREF fund only costs 0.15%.

Q. I have investments in taxable accounts and have been told that I should put tax inefficient funds like bonds in my tax-advantaged 401(k) and put tax efficient index stock funds in my taxable accounts. Can I do this with the Target Retirement plans?

A. We can't advise you on your taxes. But in addition to the Target Retirement funds, the 401(k) plan offers 6 individual funds (including 2 bond funds and a money market) from which to choose your allocations.

Q. I want to own the Total Stock Market (like Vanguard's VTSMX). How can I do that with the fund offerings?

A. As shown at Vanguard, you can replicate the Total Stock Market by purchasing 79% Vanguard S&P 500 Index Fund (VFINX) and 21% Vanguard Extended Market Index (VEXMX).

Q. What are the fees for the 401(k) plan?

A. The fees range from 0.15% to 0.26% per year. So, on a $10,000 balance, you will be paying less than $26 per year. By contrast, the John Hancock funds charged expense ratios of between 1.05% and 2.15%.

Here are my thoughts now that the transition is over:

+ Rewriting plan documents is always a pain, although EF did a nice job and have been very cooperative in the transition.

+ EF's sponsor/participant website is a hosted service provided by Sungard Reliant. It has all the necessary functionality, but is badly in need of a refresh (in particular, it should not use frames and needs to look better on Firefox). However, this isn't really EF's fault, and the website does meet all of our needs. I believe it's much smarter for EF to work off of a 3rd party hosted platform than to invest in their own proprietary solution.

+ EF can provide any mutual fund you want. However, they appropriately tout the EF Smart Plan, which very cleverly imitates the federal government's Thrift Savings Plan to provide a low-cost menu of indexed funds. My first complaint is that as an analogue to the TSP's G fund, EF recommended VUSTX, the Long-term Treasury Fund, over VFITX, the intermediate-term one. I received a lot of good advice from this board on this thread.

+ As much as I prefer the TSP to almost all alternatives, it has some flaws. Of course, these can't be held against EF, as they'll put any fund in your plan that you ask them to. As a fund fiduciary, I liked the simplicity of modeling my plan on the TSP's. However, there are 3 things I would have changed, if I hadn't been explicitly modeling our plan on the TSP:

1) The TSP I fund and the EF equivalent track the EAFE Index, which doesn't give access to Emerging Markets or Canada. FTSE All World Ex-US is better in both regards. However, the FTSE has a 0.40 ER and a purchase fee, as opposed to only 0.15 ER and no purchase fee for the TIAA-CREF Institutional International fund.

2) Second, I think offering the S&P500 and Extended Index separately is unnecessarily confusing, and both funds should be replaced with VG Total Stock Market.

3) Finally, I think the TSP should consider including an Inflation Protected Bond Fund.

Interestingly, using the VG Target Retirement funds fixes all of my complaints, as it uses the Total Stock Market, offers Emerging Markets (though not Canada), and provides Inflation Protected Bonds in later years.

Anyway, I'm a fan of Employee Fiduciary's and would recommend them to any small or medium business. Hopefully this post can help some Bogleheads convince their employers to switch to a better plan.
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x

Postby TimDex » Thu Dec 27, 2007 5:28 pm

Lucky employees...

You did a nice job. Congratulations.

Tim
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Postby livesoft » Thu Dec 27, 2007 5:44 pm

Thank you for sharing all of this when you didn't have to. It will be very helpful when my employer's 401(k) committee meets early next year. Thanks!
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Postby stratton » Thu Dec 27, 2007 5:59 pm

Excellent.

The only missing item that fits the plans investment philosophy might be a TIPS fund.

Paul
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Postby Ted Valentine » Thu Dec 27, 2007 6:20 pm

Do you know if EF does "safe harbor" 401k's? Do you know if there are any difficulties in transferring a safe harbor plan?
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Postby MossySF » Thu Dec 27, 2007 7:07 pm

Ted Valentine wrote:Do you know if EF does "safe harbor" 401k's? Do you know if there are any difficulties in transferring a safe harbor plan?


I'm in the process of converting my company's safe harbor over to EF. No problems -- other than me being a bit behind on doing the legwork with too many other deadlines to deal with.
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thanks

Postby grok87 » Fri Dec 28, 2007 12:34 am

howdy,
thanks for the very complete description. Now if only I could get my company to switch from Fido to Vanguard.

Is the minimum for Vanguard really $3M. I thought it was $10 M.

cheers
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Postby xerty24 » Fri Dec 28, 2007 5:12 am

Does EF let you do ETF investing, as well as just mutual funds? I thought I recalled something about this when I was reading a bit on EF. I'd be interest to know more about how it works, transaction fees, etc.

I know there are better ETFs in some categories like emerging markets (VWO) than their are mutual funds.
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Postby MossySF » Fri Dec 28, 2007 1:58 pm

xerty24 wrote:Does EF let you do ETF investing, as well as just mutual funds? I thought I recalled something about this when I was reading a bit on EF. I'd be interest to know more about how it works, transaction fees, etc.

I know there are better ETFs in some categories like emerging markets (VWO) than their are mutual funds.


A fixed $500 per year per ETF. I believe they can either charge it to the employer or spread it out amongst the plan/etf participants.
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Great job

Postby savermike » Fri Dec 28, 2007 5:12 pm

This looks fantastic--congratulations. Your plan is far, far better than our 401(k), which has something like 100 times the assets. That's before the 100% match you mentioned in another post, mind you.

I hope that a few people in your organization sooner or later realize how much has been done for them by the plan change.

Mike
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Postby Ted Valentine » Fri Dec 28, 2007 6:43 pm

MossySF wrote:
I'm in the process of converting my company's safe harbor over to EF. No problems -- other than me being a bit behind on doing the legwork with too many other deadlines to deal with.


Thank you. That is good to know. We currently have a 401k safe harbor plan with only american fund choices. If I stick around here I will eventually push for a change, or at least more choices (like Vanguard). I looked at EF's offerings and it appears they do offer American Funds. So if EF is cheaper, it should be a no brainer.
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Postby Helot » Fri Dec 28, 2007 6:47 pm

Sounds like you did your employees a great service.

Quick question, though. Why did you choose the Vanguard index fund offerings over the Fidelity offerings considering the latter are less expensive?

Thanks!
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Postby leonard » Sat Dec 29, 2007 3:33 pm

Outstanding!

Your FAQ format shows great thinking on how to put employees concerns first.

Nicely proves that small/medium sized companies can have a reasonably low cost 401k with great fund selection. I hope more people post their results.

Also, if you feel up to it, would you mind giving one more update on your 401k in 1 year or so? I am interested in feedback you get on whether employees recongnize the value of the plan. Does it have an impact on turnover, job satisfaction, etc? Also, other issues that come up that you have to solve.

Again, very, very nicely done.
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: A Review of Employee Fiduciary's 401(k)

Postby Dan Kohn » Sat Dec 29, 2007 5:01 pm

Thanks everyone for your comments.

stratton wrote:The only missing item that fits the plans investment philosophy might be a TIPS fund.


I think this is an important point. In this post, we're discussing the degree to which G Fund serves as a hedge against inflation. The challenge with emulating the TSP is that the G Fund is such a unique beast. In duration and credit risk, it's like the Intermediate Treasury Fund, which is what we use. We also include a Money Market fund to emulate the G Fund's lack of risk to principal. But I wonder whether we shouldn't also include Vanguard Inflation-Protected Securities (VIPSX) [0.20] in order to try to emulate the G Fund's inflation-protection aspects. I personally hold VIPSX in my and my wife's IRAs, but I suspect many of our employees don't have IRAs.

grok87 wrote:thanks for the very complete description. Now if only I could get my company to switch from Fido to Vanguard.

Is the minimum for Vanguard really $3M. I thought it was $10 M.


I spoke to Vanguard almost a year ago and don't quite remember, and I don't see the minimum plan size on their website. You can reach them at 1-800-523-1036, and please post the answer if you call. I suspect that Employee Fiduciary may still be cheaper even for smaller plans that qualify with Vanguard.

savermike wrote:I hope that a few people in your organization sooner or later realize how much has been done for them by the plan change.


So far, not so much. One recent email I received said: "It seems our choices are now much more limited."

I should have mentioned that I also sent every employee (and former employees who participate in the plan) a copy of the Boglehead's Guide to Investing this month. Hopefully, they'll have a chance to peruse it and better understand the value of the plan we're using.

helot wrote:Quick question, though. Why did you choose the Vanguard index fund offerings over the Fidelity offerings considering the latter are less expensive?


Helot, just sticking with the default is so much easier than questioning one's assumptions. However, on reviewing this further, it looks like switching to Fidelity Spartan funds is probably a better idea. I'd appreciate if you could comment in the thread where I discuss the change.

Thanks very much for asking the question.

leaonard wrote:Also, if you feel up to it, would you mind giving one more update on your 401k in 1 year or so? I am interested in feedback you get on whether employees recongnize the value of the plan. Does it have an impact on turnover, job satisfaction, etc? Also, other issues that come up that you have to solve.

Again, very, very nicely done.


leonard, thanks for your positive comments. However, please see this thread on how I will probably be trying to improve the plan.

I will be happy to repost in a year or so, or sooner if anything dramatic happens. Of course, with a 401(k) plan, we're trying to avoid drama. Stay the course!
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Postby Cloud » Sat Jan 12, 2008 5:12 pm

Thanks Howdy for sharing your experience with your move to (EF) Employee Fiduciary. I’m glad to hear so many positives from you. I wish I could say the same.

The plusses:
We just moved from an insurance run 401K plan provider similar to yours to EF a few months ago. We’re saving a bucket load of money in fees with this move for our small company. We were able to pick the funds we wanted (mostly Vanguard) when setting up the account. So far so good.

The minuses:
The EF web site participants log into has some typos and mistakes. It contains errors showing purchase price of some shares off by two decimal places and often still shows pending trades when the shares were in fact purchased, sometimes weeks ago.

When the weekly payroll contribution is sent in, EF has been inconsistent in the purchase date/s of investing this new money. It’s anyone’s guess at this point.

I’ve been on the phone and sent many emails about having their web site typos corrected. They assure me the correct prices were received, and I believe them as the total balances add up, but this is not acceptable as these typos have still not been corrected to date!! Employees are calling me asking why trades from weeks ago are still showing up as pending and asking me if their money was ever invested…. I’ve had to pick up the phone and call EF a few too many times about these issues.

When the final decision was made to go with EF it was between them and Fidelity. Knowing what I now know, I would have gone with Fidelity as I don’t have time to deal with the mistakes of our new record keeper. I know Fidelity costs more in fees but time is money and it’s quite frankly very frustrating when I have to explain to employees that their life savings was actually invested correctly and the web site is just in error!!!!

I hope this was just new account set-up issue that will be resolved very soon. Going forward things must be smoother. I’ll stick it out because we do like to save money, but there comes a breaking point were if this keeps up I’ll be calling Fidelity.
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Update

Postby Alex Frakt » Mon Oct 13, 2008 11:55 am

I was just asked about a 401(k) administrator. Can we get an update now that you've had several months experience with EF? I'm also happy to hear from anyone else who a different plan that they like.
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Still good

Postby Dan Kohn » Mon Oct 13, 2008 12:01 pm

Everything has still been good with Employee Fiduciary. Once you get the plan set up, it takes very little effort over time.
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EF 401k is 'do-it-yourself'

Postby orrgroup » Mon Oct 13, 2008 7:37 pm

There is no doubt they have a low expense k plan, and it is because they cut out any advice component as well as use index funds at their retail no-load pricing. Now, I am all for cutting out the excessive margins that life insurers levy on their 401k products, in addition to their reliance on active funds. They are really raping people in my view. But I believe by cutting out the investment advice component, one may be spending a dime, in actuality, to save a nickel.

People, employees or employers, get investor returns, not investment returns. Yes, it is well to have only passive index funds, like Vanguard (although I think DFA is superior in passive mgmt), and you can drive the expense ratio way down for sure. But there has been no work to help with the inevitable emotions that will come to knock someone off track regardless of what funds they are in or what they are paying. We only need to look at a week like this past week to see the import of a fiduciary advisor working to provide perspective and to keep people from capitulating.

Dalbar research shows that average investor equity returns in 20 years are 4% when active funds are 10% and index funds are 12%. Something has to be going on in these twenty years to keep investor's from earning the returns that are duly theirs. And that something is investor behavior. Thus, behavioral management is needed and a good advisor can do that for a fee that is well worth it.
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Postby leonard » Mon Oct 13, 2008 8:11 pm

orrgroup wrote:Dalbar research shows that average investor equity returns in 20 years are 4% when active funds are 10% and index funds are 12%. Something has to be going on in these twenty years to keep investor's from earning the returns that are duly theirs. And that something is investor behavior. Thus, behavioral management is needed and a good advisor can do that for a fee that is well worth it.


Many investors have been investing over those last 20 years in advisor oriented 401k's. If behavioral management is a benefit of a good advisor - why didn't people do better than a 4% return, if they are using expensive 401k's with advisors?
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Federal TSP

Postby Laura » Mon Oct 13, 2008 8:45 pm

orrgroup,

The Federal TSP program is one of the best around and it actually offers no advice at all. In fact, it offers only 5 different funds then blends those 5 together into Lifecycle funds. Simple, straightforward, and very, very low cost. Most employees would come out way ahead if they had this type of plan to work with for their own retirement.

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Postby orrgroup » Mon Oct 13, 2008 8:57 pm

Not completely true, but partly true for sure.

There are really two types of advisors. For the vast majority of plans, and for the majority of the past twenty years of time, one of these advisors were, in fact, present at most 401k pans and providing whatever it was they were providing in terms of service. In most cases, these 'advisors' were part of large sales organizations, whether the life insurance companies (MetLife, etc) or wirehouses (Merrill, etc).

These folks are really part of a non-advisory culture. Its a sales culture. The meetings and conferences they attend with their peers are all production-based, compensation is too, and most focus is really placed on advisor goals not client goals, although this is never shared with the public. And these folks are not fiduciaries, legally-speaking. They are more taught to produce, to grow assets, and to tow the company line (ie our active funds are great, our money managers are wonderful, our research is exemplary, etc.) versus doing what is in the best interests of participants. And, as a result, they were certainly not providing the needed advice, behavioral management, or commitment to the participant's best interests over the past 20 years. Heck, most of these folks don't even make it to the three year mark in the 100% eat-what-you-kill culture of retail financial services. It's no wonder they cannot be counted to being there for participants over the years.

Then there are the other advisors. These are becoming more and more prevalent, although they wont be anything similar in size as the reps from the sales organizations. But most of these advisors actually came from these organizations, but left after many years of formative training and after discovering these organizations are anything but fiduciary-driven or participant-driven. Legally, they are registered investment advisers (RIAs) who are legal fiduciaries by federal law and by SEC mandate. They tend to all be Fee-Only as well, although some are not. Fee-Only means they accept no compensation from 3rd parties. Only the plan or the client pays them, never an insurance company or mutual fund company. There are no 12b1 fees allowed, revenue sharing, or any referral fees even. The idea is to limit conflicts of interest that definitely come when compensation is variable in nature or contingent of purchasing something.

The end result is that a fiduciary investment advisor is certainly better. An RIA that is. Especially one who is fee-only, which less than 2% of advisors can meet the requirements to become a member of the prevailing association of fee-only advisors, NAPFA. But they are fairly rare in 401k. 401k is still predominantly a) sold by reps from sales orgs and b) serviced by these same reps. In this instance, I would take my chances, if I were an employer, with EF (but before signing up with EF, I would do some more research. In my view, paying a fiduciary adviser .25% or .50% for the advice component is definitely worth it) as opposed to ANY life insurer platform (hancock, principal, hartford, ING, Nationwide, etc) serviced by an adviser who is really a licensed insurance agent because these platforms only require a state insurance license to sell or service.

Thats right, no investment training needed, no SEC license, no securities license needed, only a state insurance license required to sell an insurer 401k platform. And guess how difficult that is to get? Not very. Because these insurer-401k platforms are what are referred to as "non-registered" products. They do not have to register as a security because the insurance industry couched these platforms into group annuity products. Group annuities are regulated insurance products, not security products.

The insurers garnered this preferential treatment from the legislatures for a reason. They knew that if all that was needed was an insurance license, it would be so much better for their distribution and marketing goals. It would, essentially, allow any insurance agent in the country to be able to instantly get into the 401k business. They need only contact the insurance agents of the country and ask them if they wanted to supplement their income. Can anyone say 'low barriers to entry'? And they were right.

In my view, the reason the insurers have the vastly greater number of plans out there is because of distribution, not product superiority. Its definitely a strategic advantage that they have because their products are weak when you look at fund expenses, predominance of active funds, revenue-sharing being the norm, and all the unnecessary expenses that inhibit the goal of creating income security.

Again, the first advisor is typically insurance-licensed and not sophisticated in the least in terms of objective financial planning or investment management. They tend to be struggling financially, on 100% commission, and wondering where their next client is coming from. If they show up, they are always looking at product sales opportunities in the Aflac fashion. Funny but true.

The other advisor is the real advisor and he or she will seek to get the returns that are there for participants, and rightfully theirs. Its a combination of lower investment expense via indexing and using an open-architecture 401k platform (much cheaper) and also fiduciary-advice and investor behavior management on an ongoing basis. 20 years, after all, is a long time. Many things will happen to distract one away from staying the course. In my view, only a fiduciary adviser will be able to help the most from avoiding these mistakes.

So, those are the two types of advisors out there.
Andrew
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TSP

Postby orrgroup » Mon Oct 13, 2008 9:24 pm

Laura,

Yes I am familiar with the TSP. It has the S fund(stock), the i fund(international), the b fund(bond), r fund (real estate) etc. And the Lifestyle portfolios are optimized mixes of these funds along a risk spectrum or 'efficient frontier'. I think the cost is like 2bp or 5 bp. Real cheap thanks to the 10 billion or so in the plan. Great economies of scale.

But my point is focused on the behavioral aspects of successful investing. Behavioral finance PhDs, most notably Dr. Richard Thaler and Dr. Daniel Kahneman, have studied how cogitive influences cause certain financial behavior and most of it is counter-productive to 'staying the course'.

And although the low cost of the TSP is unbeatable by anyone, thanks to the scale of the assets, their performance is not unbeatable to the academically-based passive mgmt practices of DFA. I think what DFA does for .29% is far greater because it actually accesses more of the market premiums where return has been studied to be greatest over longer periods. Mainly value stocks and small stocks. They own every stock, but they weight the portfolios more toward small and value because the return premiums (returns in excess of a risk-free investment such as t-bills). And they are superior 'behind the scenes' when it comes to fund company trade execution. This is also why I think they are superior to Vanguard. So, DFA looks at the entire investment cycle of buying and selling from the standpoint of the investor as well as the fund company, and they have tried to come up with processes that tweak as much value as possible and reduce costs as much as possible.

It may be cheaper to have a computer buy and sell your shares based on a corporate index, like the S&P for instance, but that does in no way guarantee best execution trading results. Most index funds tend to focus on anything and everything to get the expense ratio down, when they really should be asking themselves what will create the best outcome. At the end of the day, billions need to be traded on a semi-ongoing basis. There are optimal times to trade and then there are not. This affects passive strategies very much. I just think the PhDs of DFA and all of their incredible research and academic-approaches have created the better passive approach to investing.

Heck, they even don't let any retail investors in! Why? Because the average retail investor is undisciplined. Juts look at fund outflows last week from the market. It was $50 billion, and most of it from undisciplined investors in my view. Pure capitulation. There is a cost associated with that at the fund company level and that is why DFA has always eschewed retail investors from retail channels. Only fee-only advisers offer the access and DFA did this because they felt discipline would be better thanks to the educational efforts and relationship aspects that fee-only planners have with their clients. Plus, most clients tend to be above average in terms of affluence, and thus education is higher and discipline better.

The point is, they have thought through, and continue to do so, all aspects that relate to cost. It would be naive to think it all success simply relates to expense ratio.
Andrew
Last edited by orrgroup on Mon Oct 13, 2008 9:36 pm, edited 1 time in total.
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TSP

Postby Laura » Mon Oct 13, 2008 9:35 pm

Andrew,

You might want to do a bit more research on the TSP program. The five funds are:

C - S&P 500
S - Mid/small cap
I - EAFE International
F - Lehman Brothers (Total Bond Market tracking)
G - special government securities for TSP

No real estate and no B fund at this point.

There are endless debates on DFA vs Vanguard here on this forum. I am sure you will enjoy them. Are you a DFA advisor?

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Postby orrgroup » Mon Oct 13, 2008 9:38 pm

Sorry about the alphabet soup mixup. I hadn't looked at the plan in years.

I wouldn't mind doing an analysis on the funds. Do you have a website that lists the performances?

Yes, we are DFA.
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TSP

Postby Laura » Mon Oct 13, 2008 9:41 pm

Andrew,

All the information is available on the http://www.tsp.gov website.

I could tell you are a DFA advisor because your arguments come straight from DFA material that many other DFA advisors who are members here have posted previously. Welcome aboard. I am sure you will enjoy the ride.

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Postby grok87 » Mon Oct 13, 2008 9:48 pm

orrgroup wrote:Sorry about the alphabet soup mixup. I hadn't looked at the plan in years.

I wouldn't mind doing an analysis on the funds. Do you have a website that lists the performances?

Yes, we are DFA.
Andrew

Andrew,
You referred above to the extra 0.29% expenses of the DFA funds. Not sure that's the right number. But even if it is, of course that is not the whole story as there are of course the advisor fees that go with paying an DFA advisor. And of course those fees are after tax, whereas most fund expense ratios are effectively pre-tax. So would you mind posting your firms AUM fees, or alternativey I suppose you could retract your claim regarding the 0.29%- personally I consider that very misleading.


Personally I do buy into the small and value premiums, but I think you can access those just fine using the Vanguard Small Cap Value Index Fund.

cheers,
grok, CFA | "You can only convince people who think they can benefit from being convinced."- Taleb
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Postby Cloud » Mon Oct 13, 2008 9:48 pm

orrgroup, most small company 401K plan offer no advice yet rip the customers off with 1 to 2% daily asset charges while steering people to loaded fund and revenue sharing funds to line their pockets. EF might not give advice but they certainly don't steal your money like most. I personally have saved a small fortune by switching to EF. There's no amount of advice that was going to make up for the 2% in fees we were paying with Guardian.

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Postby orrgroup » Mon Oct 13, 2008 9:51 pm

Just don't assume that what is found on 'DFA material' is believed true by me. I am always open to new or opposing thinking, I just haven't found anything credible, in terms of convincing me, that explains returns over time better than the stereotypically-DFA size and value premium arguments, in addition to their trading practices.

I had a stint where I favored Professor Seigel's approach with WisdomTree. But have since become convinced that he is simply tapping value premiums. Plus, he has trailed DFA by about 1% since he debuted.

Who knows...

:)
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Andrew

Postby Laura » Mon Oct 13, 2008 9:53 pm

Who knows...


Certainly not me. :)

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Postby orrgroup » Mon Oct 13, 2008 10:08 pm

Grok87,

I was just saying that DFA expenses of .29% are worth it compared to Vanguard, and perhaps even the TSP. I was not suggesting that a .29% expense included the advice component and certainly did not mean to mislead.

Both the TSP and EF plans have no advice component, no in-person service, and, thus, no behavioral management. You simply have a low expense ratio. For people on these boards, that may be fine, although behavioral biases being what they are (fear, greed, euphoria, speculation , etc), a fiduciary adviser can be a good thing.

As far as what we charge for plans, it is pretty simple. Like EF, our technology platform provider, a company called 401kasp out of Tampa, charges $1500 a year plus $40 per participant. DFA averages, say, .29%. We charge .25% to .50% maximum. SThats it.

I would use EF if they had a technology platform like 401kasp has. That way, at least for 30 people, clients could save on the $40 per head. But, as was described earlier in this thread, EF's online technology, while satisfactory, appears to have shortcomings.
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TSP funds

Postby orrgroup » Mon Oct 13, 2008 10:30 pm

SO, I have been perusing the TSP site. Its interesting that there is data posted there, but none, at least that I can find, that shows 3 yr history, annualized. Obviously this can be calculated manually with the various returns given, but what a pain. You would think their site does this for you.


By the way, the L2040 fund is 80% equity. In 2006, it earned 16.53%. In 2007, it earned 7.36%.

Our DFA portfolio that has an 80% equity mix earned 19.87% in 2006, and 3.37% in 2007.

I think the absence of the value/size premiums in '07 were factors for DFA underperformance in '07. Still, not enough time to be definitive. I wonder if anyone has created backtests of normal optimized mixes of the TSP funds that go back much farther to see what rebalanced portfolios of these funds would have earned. Anyone aware of this type of analysis?

YTD in 2008? TSP L2040 has earned -17.04% and our 80/20 DFA earned
-14.94%. Both thru 9/30. It would be interesting to see how they are doing in the crazy month of October.

Andrew

PS: Our advisory fee is not included and must be reduced from the returns. Dont want to mislead anyone.
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Apples to Oranges

Postby Laura » Mon Oct 13, 2008 10:40 pm

Andrew,

Thank you for looking at past returns but since they have no bearing on future returns they are basically useless. At the same time, comparing an 80/20 Lifecycle fund to some unknown asset allocation in another 80/20 fund is also basically useless. Are they identical? I doubt it. How much international? What type of bonds? etc, etc, etc. These are games that are played frequently to show out performance but that argument doesn't fly on this website. Sorry.

We debate endlessly on the value premium and whether it is risk based, behavioral, both, or neither. So far, despite our best efforts, we have failed to reach a satisfactory conclusion that everyone agrees on. Oh well, at least we have something to talk about besides the market ups and downs.

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Postby supertreat » Tue Oct 14, 2008 12:38 am

Just my two cents here... DFA and Vanguard I would say are the top two mutual fund companies available to investors today... period. Both have positives and negatives depending on ones situation. I think most people who use Vanguard index funds would jump at the chance to use DFAs funds to compliment their portfolio if they could do so without the advisor limitation. That being said, I understand why DFA has implemented that policy for the interest of their shareholders. I also think that if there ever was such a thing as a "good seal of approval" for an investment advisor... one could do far worse than looking for a DFA advisor.
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Re: TSP funds

Postby supertreat » Tue Oct 14, 2008 12:45 am

orrgroup wrote:SO, I have been perusing the TSP site. Its interesting that there is data posted there, but none, at least that I can find, that shows 3 yr history, annualized. Obviously this can be calculated manually with the various returns given, but what a pain. You would think their site does this for you.


The TSP site shows the 10 yr annualized returns under "historic returns". It does not show 3 year annualized returns... but I'm not sure why this would be important.
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EF, Vanguard and DFA

Postby superskid » Tue Oct 14, 2008 1:05 am

Andrew,

I am a principal at Employee Fiduciary. We handle many, many plans with 100% Vanguard funds or nearly 100% Vanguard Funds. We also handle many plans for DFA approved advisors, with DFA Funds, who use us for daily recordkeeping and TPA services. I am familiar with 401(k)ASP. It is inaccurate to state that we have less functionality and inaccurate to state that our fees are the same. We offer full service, daily recordkeeping and compliance. Since 2005, we've guaranteed the lowest total cost, full service plans in the nation. We provide our clients with dedicated plan administrators, toll free help line, same day trading, same day contribution processing, full document and plan design support, ERISA help from staffers that include those who serve on the technical advisory board for qualified plans for AICPA. We receive referrals--based on merit alone--from two of the three largest mutual funds companies, have no proprietary fund requirements, have been written up in Forbes and touted by the editors of Money Magazine.

If you're interested, I'd be happy to provide you with testimonials from many happy DFA advisors and their clients whom we jointly serve.

This Board is a great forum to discuss the relative merits of Vanguard Funds vs. other approaches, and to discuss different service providers that offer companies access to low cost funds but please be accurate with your representations of these other service providers.
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Postby orrgroup » Tue Oct 14, 2008 8:41 am

Thanks Laura
Last edited by orrgroup on Tue Oct 14, 2008 8:51 am, edited 1 time in total.
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Postby orrgroup » Tue Oct 14, 2008 8:50 am

Thanks superskid. Please show me where I say that your pricing is the same as 401kasp? I cant find it. I shared 401kasp's annual cost of $1500 which is what we pay, plus $40 a head, a charge you do not have up to 30 people, the way I read it. You have less transfer fee, etc. There is no question you are less.

As to the IT, please forgive me for any slight taken. I was referring to an earlier post where someone noticed typos and some other issues with the web experience. If you have something similar to what 401kasp has built, I would be delighted to learn this.

Andrew
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Re: EF, Vanguard and DFA

Postby Cloud » Tue Oct 14, 2008 10:33 am

superskid wrote:Andrew,

I am a principal at Employee Fiduciary. We handle many, many plans with 100% Vanguard funds or nearly 100% Vanguard Funds. We also handle many plans for DFA approved advisors, with DFA Funds, who use us for daily recordkeeping and TPA services. I am familiar with 401(k)ASP. It is inaccurate to state that we have less functionality and inaccurate to state that our fees are the same. We offer full service, daily recordkeeping and compliance. Since 2005, we've guaranteed the lowest total cost, full service plans in the nation. We provide our clients with dedicated plan administrators, toll free help line, same day trading, same day contribution processing, full document and plan design support, ERISA help from staffers that include those who serve on the technical advisory board for qualified plans for AICPA. We receive referrals--based on merit alone--from two of the three largest mutual funds companies, have no proprietary fund requirements, have been written up in Forbes and touted by the editors of Money Magazine.

If you're interested, I'd be happy to provide you with testimonials from many happy DFA advisors and their clients whom we jointly serve.

This Board is a great forum to discuss the relative merits of Vanguard Funds vs. other approaches, and to discuss different service providers that offer companies access to low cost funds but please be accurate with your representations of these other service providers.


My 401K is currently with EF....
My weekly deposits are not always invested the same day, most are done fairly quickly, but just last week I had a deposit sit uninvested for a week. After two e-mails to ask what the problem was the money was invested. Currently my 10/10 deposit is sitting in the account uninvested.
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EF, Vanguard and DFA

Postby superskid » Tue Oct 14, 2008 11:12 am

Dear Cloud,

We are looking into the items you addressed with your plan and will follow up shortly.
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Re: Apples to Oranges

Postby ddb » Tue Oct 14, 2008 12:05 pm

Laura wrote:Thank you for looking at past returns but since they have no bearing on future returns they are basically useless. At the same time, comparing an 80/20 Lifecycle fund to some unknown asset allocation in another 80/20 fund is also basically useless. Are they identical? I doubt it. How much international? What type of bonds? etc, etc, etc. These are games that are played frequently to show out performance but that argument doesn't fly on this website. Sorry.


Agree with the above. Andrew, your "comparitive analysis" methods seem very rudimentary. Simply comparing returns is meaningless without comparing the risk that was taken to earn the returns. Consider the following two "80/20" portfolios:

Portfolio 1: 80% small-cap value, 20% B-rated corporate bonds
Portfolio 2: 80% large-cap growth, 20% 1-3 year government bonds

Both are 80/20, but Portfolio 1 has a much higher expected return, and a much higher expected volatility.

We debate endlessly on the value premium and whether it is risk based, behavioral, both, or neither. So far, despite our best efforts, we have failed to reach a satisfactory conclusion that everyone agrees on. Oh well, at least we have something to talk about besides the market ups and downs.


Well, there does seem to be a consensus that whatever the source of the excess return for SmB and HmL factors, the excess return does NOT constitute a free lunch (just like the equity premium over bonds is not a free lunch). This is not to say that targeting these risk factors isn't worthwhile (either via DFA funds or other index funds/ETFs), but the risk must be understood.

As the years go on, I am becoming less and less convinced that DFA offers value, particularly in light of ETF offerings that are available at lower costs. And for bonds, I just think it makes so much more sense to hold individual bonds than to use funds (except for smaller investors, where bond funds are just easier).

Just look at what you can buy to build the global equity market in the ETF world: VTI (total US stock market), RZV (US deep small value), VEA (foreign developed large-cap), VWO (foreign emerging large- cap), and DLS (foreign small value). With those five funds, you can approximately replicate the global equity market, or you can tilt to HmL and SmB risk factors. Only thing missing is small-company emerging markets, but I question that value of this as it would represent such a small portion of the portfolio anyway. Depending on weighting, a portfolio of these funds would carry an expense ratio of just 15-30bps.

So, ignoring the advisor fee for a moment, you're looking at paying an additional 30bps or so for the DFA fund expenses. Can they overcome this fee? Proponents say their securities-lending practices and effective security screening will make up the difference, and this has certainly been true on a historical basis. However, I am skeptical that DFA can continue their successful track record now that they have $100B (or whatever) in assets, when most of their successful track record occurred at MUCH lower asset levels.

I do not think DFA funds are bad, but I am disappointed that they have largely become a marketing and/or status tool for lots of advisors. In this thread alone, DFA access was considered by a poster to be a "seal of approval" for an investment advisor - uh, okay, but even DFAs advisor-approval process in no way verifies competence.

Sorry for the long post/rant!

- DDB
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EF, Vanguard and DFA

Postby superskid » Tue Oct 14, 2008 6:25 pm

Dear Cloud,

Thanks for bringing these concerns to our attention. We do allow same day investing on the same day that the funding ACH (bank wire) goes through, assuming that the stock market is open and that you follow our standard contribution procedures.

Here is a history of your recent payroll contributions:

1. Payroll file submitted 9/12/08. ACH received 9/12/08. Contributions invested 9/12/08.
2. Payroll file submitted 9/19/08. ACH received 9/19/08. Contributions invested on 9/19/08.
3. Payroll file submitted 9/29/08. ACH received 9/25/08. Contributions invested on 10/3/08. *

* In this case, the cause of the delay was you initiating an ACH prior to submitting payroll files. This is not a problem for 99% of our clients who merely submit a payroll file (or have their payroll provider submit a file) and allow us to take care of the rest.

Given your decision to handle contribution processing differently from our standard procedures and how the data arrived, participants were still fully invested within the turnaround time as stated in our service agreement for non standard processing.

(If you would like to discuss this issue in greater detail or wish to follow our standard procedure for contribution processing, feel free to contact anyone on our staff or your dedicated administrator through our toll-free number).

4. Payroll file submitted 10/2/08. ACH received 10/3/08. Contributions invested on 10/3/08.
5. Payroll file submitted 10/9/08. ACH received 10/10/08. Contributions invested on 10/14/08.**

**In this case, the ACH came in after the posting deadline on 10/10/08, which was a Friday. Banks were closed for Columbus Day on Monday 10/13/08, which is a federal banking holiday. Because of that the contributions were posted on 10/14/08.

In each of these cases, your plan was fully invested on the same day the ACH arrived, assuming the banks and markets are open, with the exception of #3, which could be remedied in the future if you opt to handle contribution processing in the same manner that our other clients do, with is also consistent with current industry standards.

Hope this is helpful. If you need additional information, kindly give our office a call or speak with your dedicated administrator here.
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Did any employees comment on the advice component?

Postby lawman3966 » Sun Aug 29, 2010 1:43 am

Dan Kohn wrote:Everything has still been good with Employee Fiduciary. Once you get the plan set up, it takes very little effort over time.


Dan,
I realize it's been a while since the last post on this thread, but I am curious about one point. This thread includes significant back and forth on the issue of financial/investment advice. Therefore, I am curious to know whether you ran into any obstacles from employees who were not comfortable selecting their own mutual funds, and if so, how these concerns were allayed.

The people I need to persuade in this matter are busy, and I'll need to have my ducks in a row if and when I choose to bring this matter up. I can't afford to seem like a pest by serially suggesting different alternatives to our current enrich-the-insurance-company 401K scheme.

Thanks in advance for any info you can provide on this point.
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Postby Lethal » Mon Sep 27, 2010 1:25 pm

I am looking into EF for our small law firm's 401k. We currently have a very high cost plan and a RIA from Merill Lynch who doesn't seem do much since helping to put our new plan together in Dec. '07. I trying to figure out the best way to select funds for our plan and to get education and investment advice for our employees when we make the plan switch. EF told me that there is an over the phone advising service to help select funds for a flat $600 fee.

We only have about 15 participants and ML never comes in to the office and I don't believe any of our employees have ever called them for their services. I don't think they have done anything in the past 2 years to earn their 0.5% fee (maybe more?). I'm leaning towards getting rid of the advising service since we don't seem to use it, but I'm not sure on how to move forward setting up a new plan or how to handle the financial/investment advice.
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Re: Did any employees comment on the advice component?

Postby fcirullo » Mon Sep 27, 2010 3:20 pm

lawman3966 wrote: The people I need to persuade in this matter are busy, and I'll need to have my ducks in a row if and when I choose to bring this matter up. I can't afford to seem like a pest by serially suggesting different alternatives to our current enrich-the-insurance-company 401K scheme.

Thanks in advance for any info you can provide on this point.


Did you get your questions answered? I am asking because your post was on August 29, 2010.
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Postby fcirullo » Mon Sep 27, 2010 3:26 pm

Lethal wrote:I am looking into EF for our small law firm's 401k. We currently have a very high cost plan and a RIA from Merill Lynch who doesn't seem do much since helping to put our new plan together in Dec. '07. I trying to figure out the best way to select funds for our plan and to get education and investment advice for our employees when we make the plan switch. EF told me that there is an over the phone advising service to help select funds for a flat $600 fee.

We only have about 15 participants and ML never comes in to the office and I don't believe any of our employees have ever called them for their services. I don't think they have done anything in the past 2 years to earn their 0.5% fee (maybe more?). I'm leaning towards getting rid of the advising service since we don't seem to use it, but I'm not sure on how to move forward setting up a new plan or how to handle the financial/investment advice.


You can hire a company to provide the education. Or it's easy to provide it yourself after you learn what's important about a plan and what is not.

Would you like to learn how to provide the education yourself? Or learn how to hire someone to provide it?
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Re: A Review of Employee Fiduciary's 401(k)

Postby Sunny Sarkar » Mon Sep 27, 2010 3:47 pm

Dan Kohn wrote:They charge $25 per employee with a minimum of $1500.


What about transaction costs? 401k accounts are naturally high transaction accounts due to DCA from every paycheck.

p.s. Bravo!
“Our life is frittered away by detail. Simplify, simplify.” ― Henry David Thoreau
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Re: A Review of Employee Fiduciary's 401(k)

Postby fcirullo » Mon Sep 27, 2010 3:59 pm

Sunny Sarkar wrote:
Dan Kohn wrote:They charge $25 per employee with a minimum of $1500.


What about transaction costs? 401k accounts are naturally high transaction accounts due to DCA from every paycheck.

p.s. Bravo!


The $25.00 per eligible employee in the above quote is from an old post that was made on December 27, 2007. This is September 27, 2010 and they charge more, now. What's your question regarding transaction costs?
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Postby Lethal » Thu Oct 07, 2010 5:40 pm

fcirullo wrote:
You can hire a company to provide the education. Or it's easy to provide it yourself after you learn what's important about a plan and what is not.

Would you like to learn how to provide the education yourself? Or learn how to hire someone to provide it?


Mainly need assistance or suggestions on the new plan setup process and selecting new funds. Once it is set up and our employees choose their new fund allocation they probably wouldn't need much help since they never use our current adviser at Merrill.
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Re: A Review of Employee Fiduciary's 401(k)

Postby superskid » Thu Oct 07, 2010 6:00 pm

Sunny,

I work for Employee Fiduciary. There are no transaction costs.

Your right to be concerned about transaction costs, especially in brokerage accounts in tandem with 401(k)s.

If your plan has fewer than 30 employees and is under $1 million in assets, the fee would be $1,500 per year. This includes all the compliance, testing, Form 5500, etc. Participants pay the expense ratio of the Vanguard Funds, with no transaction costs or mark-ups.

We follow Vanguard's rules, so this assumes normal trading, not rapid short-term trading or speculation. If the latter, the employee may get dinged by short-term redemption fees, which are on many of the Vanguard Funds.
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Postby fcirullo » Thu Oct 07, 2010 8:18 pm

Lethal wrote: Mainly need assistance or suggestions on the new plan setup process and selecting new funds. Once it is set up and our employees choose their new fund allocation they probably wouldn't need much help since they never use our current adviser at Merrill.


First, Employee Fiduciary is a good choice for a TPA. Note: I don't have a business relationship with any TPA, nor am I paid in any way, shape, or form by any TPA.

Regarding setting up a plan, keep Your plan simple and make it low cost and optimal. You can find the definition of the word "optimal" and get a great education on setting up, managing, and monitoring a retirement plan at this thread. It won't take much of your time to read each post on the thread, and you'll be glad you did:
viewtopic.php?t=59347&postdays=0&postorder=asc&start=0

A plan that is low cost and optimal provides the following benefits:
Employer benefits
1. The named fiduciary will save time because a plan that is optimal requires less time to manage and monitor.
2. Your company will save money on the plan’s cost.
3. Employees won’t spend excessive time while at work trying to figure how the plan works, how to select their mix of investments, and how to monitor their investments.
Employee benefits
1. Employees won’t need to spend countless hours trying to figure how the plan works, how to select their mix of investments, and how to monitor their investments.
2. Employees will save money on the plan’s cost.
3. Employees will save money on the cost of their investments.

Your plan's menu of investments could have these asset-classes. Ask people on this thread for help with picking low cost index funds for your plan.

Equity Funds:
1. Large-cap blend index fund (Pay not more than 0.07 to 0.25%, per year)
2. Mid-cap blend index fund (Pay not more than 0.07 to 0.25%, per year)
3. Small-cap blend index fund (Pay not more than 0.07 to 0.25%, per year)
4. Foreign large-cap index fund (Pay not more than 0.25 to 0.35%, per year)

Fixed Income Funds: (Pay not more than 0.07 to 0.25%, per year for fixed income funds)
1. Money market mutual fund (This fnd may cost more than 0.25%, per year)
2. Short-term bond fund
3. Intermediate-term bond
4. Long-term bond fund

Also. you can set up a low cost Self-directed Brokerage Account for any employee who prefers to use managed mutual funds or packaged products such as target-date funds.

Managing risk:

1. A fiduciary can manage his risk by selecting a core mix of index funds. Index funds are way easier to select and monitor than managed mutual funds and packaged products such as target-date funds.

2. No one will sue the fiduciary and take him to court for not trying to beat the market by selecting managed mutual funds and packaged products such as asset-allocation, target-date, lifestyle, lifecycle, and balanced funds. Especially when not one expert has ever picked a mix of managed mutual funds and/or packaged products that beat a core mix of index funds in performance--long term.

3. Employers must educate employees by explaining to them exactly what we are discussing on this thread. If that fails to convince someone that it's better to match the market with index funds than risk underperforming it long term and a few employees still want to try their hand at picking managed mutual funds anyway, let them knock themselves out in a Self-directed Brokerage Account. Sooner or later, they will get it and invest in index funds.

4. The employer is responsible for setting up a low cost self-directed Brokerage Account for employees who want to use it. Then, the employer must monitor its cost to ensure that it is low. Also, restrictions can be placed on which mutual funds can't be included in the universe of funds that will be available in the Self-directed Brokerage Account.

Summary:
First, select the plan’s investments. Then, hire the plan’s vendors, and educate your employees about the plan and its investments.

Best wishes,
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