Tuesday, September 17, 2013

When building a 401(k) balance, what's most important?

Several years ago, I co-authored a paper linked here entitled Retirement Success: A Surprising look into the factors that Drive Positive Outcomes -->


When we authored that paper, we were attempting to quantify and set priorities towards all of the factors contributing to a participant's income replacement.  Intuitively, we knew Savings Rate would be the most important, but didn't know to what degree and how that would compare to investment quality, asset allocation and risk.  The paper did confirm that Savings Rate is worth roughly 75% of someone's ability to retire.

Recently, an article was forwarded to me authored by John Rekenthaler entitled 'What Matters Most'.  It can be found on morningstar.com linked here -->


The thought is similar to our paper from several years ago in that it looks specifically at a sample participant and attempts to define what would matter the most to her in order to allow her to retire given her specific set of circumstances.  The list below are the factors considered:

What would help her the most?

1)      Early start: Find a time machine, go back four years, and start her plan at age 38
2)      Higher salary: Get an immediate 25% raise, to $50,000 in annual salary
3)      Salary growth: Increase her salary by 4% annually rather than 3%
4)      Contribution rate: Invest 8% annually instead of 6%
5)      Company match: Receive a 75% company match instead of 50%
6)      Cheaper plan: Switch to Vanguard and pay 0.22% in fund fees rather than 0.72%
7)      Better funds: Own funds that gain 8% per year before expenses*
8)      Retire later: Wait two more years and retire at age 69, not 67

The interesting take on this to me was the reference to which of these factors are within her control and which were not.  The author identifies that three of the items above are in her control; Choosing when to start investing, choosing her contribution rate and choosing when to retire (or the length of her contribution period). The article goes on to demonstrate how most of the other items are mainly out of her control, and confirms the conclusion that we came to earlier which is that it is ALL ABOUT SAVING!!!  

It's a well done article and worth the read.  To the person who emailed it to me, thanks!

Friday, September 6, 2013

Five Steps to Mitigate Fiduciary Risk - or at least minimize it

 Every now and then we see an article of information that isn't saying anything new, but reminds us of some of the basics, i.e. the fundamentals of fiduciary best practices.  Below is an article that does just that, written in an easy to understand way, this article gives employers 5 steps to help mitigate a lot of fiduciary risk.  Thanks to the original publisher, REA & Associates Enewsletter originally authored by Paul McEwan, CPA, AIFA and linked here;


Five Steps to Mitigate Your 401k Fiduciary Risk

There is so much noise in the marketplace regarding the fiduciary responsibility of plan sponsors it's no wonder people are confused. The confusion starts with who is a fiduciary so it's important to note that fiduciary status is based on the functions performed for the plan, not a person's title.

Your plan's fiduciaries will ordinarily include the trustee, investment advisers, all individuals exercising discretion in the administration of the plan, all members of a plan's administrative committee (if you have one) and those who select committee officials. When determining if an individual or an entity is a fiduciary, you need to look at whether or not they are exercising discretion or control over your plan.

Implementing the following best practices will help you mitigate fiduciary risk:
1.     Adhere to a well-defined, deliberative, documented process.
  • Include a well-drafted investment policy statement (IPS) that describes the investment selection and monitoring criteria.
  • Review annually the performance of the plan's fund line-up to determine if it meets IPS criteria.
  • Identify all of your plan's service providers; know and understand their services and fees; monitor performance; and determine if fees are reasonable through objective plan benchmarking.
2.     Identify conflicts of interest. While they are not illegal, they will result in higher plan fees and reduced investment performance over time if not monitored. Any relationship that prevents the plan from being operated in the exclusive best interest of plan participants increases fiduciary risk.
  • Beware of financial arrangements between service providers (for example, payments from mutual fund managers to the plan record keeper, TPA or investment advisor) as they are the biggest source of conflicts. Also be aware of personal relationships between plan fiduciaries and plan service providers.
  • Use investment advisors in a fiduciary capacity and make sure they document that status in writing. If your advisors don't serve in a fiduciary capacity, be certain they are compensated on a level fee arrangement and know who pays them.
  • Seek an independent review of your plan's service providers and investment platform every three to five years. Use an outside consultant, regardless of how much you trust your advisor.
3.     Take full advantage of fiduciary safe harbors provided for in the law.
  • Comply with ERISA 404(c) if you allow participants to make investment decisions. There are three compliance areas: 1) investment menu requirements; 2) plan design and administrative requirements; and 3) information and disclosure requirements.
  • Implement a Qualified Default Investment Arrangement (QDIA), especially if your plan has automatic enrollment provisions. This is an approved investment selection for participants not making an affirmative investment election. You should also consider moving all participant balances into the QDIA and then allow participants to make affirmative elections. Be sure to comply with all QDIA requirements.  
4.     Establish a fiduciary file that contains documentation of your plan oversight activities listed above, such as:
  • All legal documents, including the IPS
  • A copy of all service provider contracts and required disclosures
  • All investment monitoring reports and prospectuses
  • Minutes of all plan committee meetings
  • All due diligence performed when selecting service providers
  • Annual Form 5500 and audited plan financial statements, if required
  • Annual plan activity summaries from service providers   
5.     Purchase fiduciary insurance. This is not an ERISA fidelity bond which is actually required coverage for all employees handling plan assets. Whereas a fidelity bond reimburses the plan for any losses resulting from dishonest acts by employees of the plan sponsor, fiduciary insurance protects the personal assets of all plan fiduciaries due to allegations of breach of fiduciary duties or failure to act prudently in the best interest of participants.

As a plan sponsor, you have the ultimate responsibility for monitoring the performance of the plan service providers your plan hires. You cannot assign or delegate away fiduciary responsibilities to another person or organization; however, you can share fiduciary status with others that may be more knowledgeable about retirement plan operations. If you don't follow the basic standards of conduct described above, you may be personally liable to restore any losses to the plan or to restore any profits made through improper use of the plan's assets resulting from their actions.

Limiting your fiduciary risk as it relates to your retirement plans is only five steps away. Follow them to protect yourself and you plan participants.