Global investment powerhouse Vanguard sharply cut the expected returns for U.S. stocks in the next decade. If the forecast proves to be accurate, the implications could be significant for retirement-plan sponsors, employees and participants.
Marketing Timing, Recent Fund Flows and Market Performance
I noticed a recent headline in Financial Advisor Magazine that reminded me of a basic investing truth that I have observed throughout my 30-year career: It’s virtually impossible to time the market.
The article, dated January 28, 2019, is titled Fund Investors Took Cover in Fixed income in 2018. The article says that mutual funds experienced $131 billion of net outflows in the month of December 2018 alone. A net fund flow is the net of all cash inflows and outflows in and out of a fund for a specified period of time.
New Year’s Resolutions for Retirement Plan Fiduciaries
Americans love making New Year’s resolutions at the beginning of the calendar year.
Generally, these self-improvement goals concern health and wellness, weight loss or improving relationships. If you are a retirement plan sponsor responsible for a 401(k) or 403(b), there are some New Year’s resolutions you should
Fort Myers News-Press Editorial Board People of the Year Finalist
I am deeply honored to have been named one of the finalists for the News-Press People of the Year award. Truthfully, the fact that my name is mentioned in the same breath as past finalists and winners of this award, many of whom are philanthropic and business heroes of mine, is truly mind blowing.
Retirement Plan Fee Disclosure: Changing The Game For Plan Sponsors - What You Need To Know
Piccirillo a Panelist at the 2010 CFDD Conference
The Real Deal: Do You Know the True Cost of Your Group Variable Annuity?
Group variable annuity products are not inherently bad choices as 401(k) investment options, however, the plan sponsor should appreciate that these are packaged products built by insurance companies and the underlying investment options are not considered retail mutual funds, but are annuity separate accounts.
401(k) Investment Options: What is The Right Number?
The Fee War: The Impact of Fees on a Participant’s Future Benefits
Stacked Coins-20100309
Chris Carosa, of the Fiduciary News Blog, recently wrote about an ongoing industry conversation that he refers to as a “401(k) Fee War.” In this article, Chris references the significant attention being paid to mutual fund expenses for 401(k) investment options. As an industry observer, I too have noticed that the attention being paid to mutual funds fees as well as other asset-based charges assessed to participants has increased dramatically in recent months. In his article, Chris reminds his readers that the assessed fees associated with servicing a retirement plan need to be reasonable. Chris also points out the current lack of specific regulations on these fees. That being said, retirement plan sponsors are wise to pay attention to the fees being assessed by fund complexes and other professional service providers to their participants.
My intended audience for this blog is not professional advisors, such as myself, who are obsessed with the pension market and monitoring trends on a weekly basis, but rather company owners who are otherwise busy professionals with limited time to dedicate to company sponsored benefits. Because my readers may not be familiar with the details of ERISA (Employee Retirement Income Security Act) and the fiduciary duties that are required of retirement plan sponsors, I thought it would be useful to provide a real world example of the impact these can have on a participant's future retirement benefits. Realistically, even small variances in asset-based charges assessed to participant account balances can have a significant impact on a participant’s future benefit.
For example, assume that two participants each contribute $250 per month to the same 401(k) investments. The only difference is the net rate of return available to each respective participant. For this example, investor A earns 8% and investor B earns 7.5% because investor B purchased mutual funds that have higher expense ratios. Based on these assumptions, investor A will have $239,342 at the end of a 25 year period of time. Investor B, who earned 7.5% over the same 25 year period, will have $220,686. As you can see, paying an additional 0.50% over that 25 year period resulted in investor B ending up with $18,656 less than investor A.
You can take this example an additional step forward by examining the difference in future benefits for these two participants due to the difference in their account balances at retirement. Assume, for example, that they each draw down their respective portfolios over a 20 year period at a 7% rate of return. Investor A could draw almost $150 per month more than investor B. Over this 20 year retirement the total difference in benefit is more than $30,000. For many retirees this is a meaningful number.
If you start to apply this thought process across multiple participant accounts, you can begin to appreciate why it is so important for plan sponsors to pay attention to the underlying expenses assessed against their participants. Clearly, not all investment expenses are bad or imprudent. However, if the same or comparable investment options are available less expensively, then plan sponsors should take action to reduce those costs.
In conclusion, the “401(k) Fee War” is likely to rage on. Unfortunately for plan sponsors, remaining neutral will not be an option. Fees impact participant performance and subsequent retirement benefits. Consequently, plan sponsors need to pay careful attention to the cost associated with providing investments and other services to participants.
To stay up-to-date on prudent practices as a retirement plan sponsor, or to share this information, please register for our newsletter by using the newsletter registration form in the sidebar of this blog, or subscribe to our RSS feed. As always, we appreciate your comments, which can be added below. For compliance reasons, comments are monitored and reviewed as soon as possible before posted.
Disclosure:
Dean Piccirillo offers insurance products through HBK Sorce Insurance LLC. Investment advisory services are offered through HBK Sorce Advisory LLC. Mr. Piccirillo is not able to transact business in a state that he is not licensed or registered.
NOT FDIC INSURED. NOT BANK GUARANTEED. MAY LOSE VALUE, INCLUDING LOSS OF PRINCIPLE. NOT INSURED BY ANY STATE OR FEDERAL AGENCY.
Does Your Employee's Financial Health Impact Your Bottom-line?
Common Fiduciary Challenges – Part 2
This article is the second in our Common Fiduciary Challenges series. As a financial advisor who consults regularly with pension clients working with my firm's retirement plan unit, there are some common issues that arise when consulting with a new client. This series is designed to highlight some of these more frequently identified issues.
Retirement Plan Fiduciary Monitoring Checklist/Questionnaire
This quiz will help you determine whether or not you are on the right track as a retirement plan fiduciary. It is not meant to be an all-inclusive, exhaustive review of every aspect of a sound fiduciary process for a qualified plan sponsor. This quiz does however cover a number of issues that retirement plan sponsors should consider and may help indicate whether further review of your internal procedures is warranted.
Common Fiduciary Challenges – Part 1
In my capacity as a professional advisor who consults regularly with plan sponsors, there are some common challenges with plan administration that I frequently encounter when a new client is referred to me. In this article, I will attempt to outline some of the most common deficiencies and what a plan sponsor can do to address them in the most effective manner.
Traditional IRA versus a Roth IRA
Currently, for Americans living on $45,000 or more per year during retirement, 18% of that income is generated from personal savings and investments1. For millions of Americans, the personal savings and investments component of our income consists largely of Individual Retirement Accounts (IRA). IRAs are tax deferred personal retirement funds that allow you to save up to $5,000 per year ($6,000 if you’re age 50 or older).
Selecting and Monitoring Mutual Funds
Have you ever been to an unfamiliar city and stopped for directions on how to get to your final destination? If you were to ask several local citizens, you would likely receive multiple and even different detailed expressions of these directions. The difficulty then becomes deciphering which “direction” will get us there quickly and with a minimal number of “wrong” turns. As investors your destinations are slightly different yet you commonly use similar investment vehicles (mutual funds) to travel this path. Each of you plan and hope to reach your goals quickly and with minimal risk.
SEP IRAs Versus SIMPLE IRAs
As the number of small businesses in the U.S. grows, the number of retirement plan choices seems to grow as well. Two popular retirement plan options for smaller businesses seek to avoid the complexities that go along with establishing a qualified retirement plan such as the 401(k). These two options are the SEP IRA (Simplified Employee Pension) and the SIMPLE IRA (Savings Incentive Match Plan for Employees).
A Retirement Plan Fiduciary’s Responsibilities – Part 2
Welcome to part two of our series on the responsibilities of a retirement plan fiduciary. In part one of this series we cited the five significant responsibilities that a retirement plan fiduciary has. Previously we spent a considerable amount of time talking about the first two responsibilities – managing the plan for the exclusive benefit of the participants and act prudently at all times.
A Retirement Plan Fiduciary’s Responsibilities – Part 1
In a previous blog post, we spent time reviewing who could be considered a retirement plan fiduciary, and what the associated responsibilities and liabilities would be. As we discussed, anyone who has the ability to act with discretion and control, with respect to the management of retirement plan sets or other investments, could be considered a fiduciary under ERISA or the Employee Retirement Income Security Act of 1974.
Non-qualified Deferred Compensation Plans
How then can companies give key employees such as corporate officers an opportunity to contribute more dollars on a pretax basis? One alternative is for the employer to establish a non-qualified deferred compensation plan. Such plans give employers a tool that enables them to legally discriminate against non-highly compensated staff. As a matter for fact, in non-qualified deferred compensation plans, employers are required to discriminate at some level.