As many retirement plan sponsors are now aware, the Department of Labor's three-pronged approach to fee disclosure for 401(k)s and other qualified plans, has brought about a series of changes that have marked the past several years.
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.
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.
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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.
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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.
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).
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).
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.
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.
Are you currently a qualified retirement plan fiduciary? If so, you may have some responsibility and perhaps liability that you were not previously aware of. Retirement plan sponsors on a national basis are coming under increased scrutiny with respect to how they administer pension plans in their care.