IFA Radio's Episode 28

IFA Radio
Friday, July 09, 2010

Click here to see A Letter for Your Plan Sponsor.

Are you saving for retirement? If you are working for a corporation, you will most likely have a 401(k) plan in place. Furthermore, you’re probably fairly prudent at depositing a portion of your earnings into the plan on a regular basis. After all, saving for retirement is a process right?  
 
Now let’s delve a bit deeper: do you know where your hard-earned earnings are in the market? Sure, your equity allocation is spread across a certain percentage of stocks and the fixed income bonds; but, do you know what the costs are of the plan? Surprise! Did you know that if your retirement is currently actively managed, three to four percent of your fund is going to the managers moving your money in an out of the market? Just a thought: shouldn’t saving for retirement require some form of relaxed investing—when did active investing enter this “relaxed” long-term picture? Finally, why subject your hard-earned retirement to luck? 
 
In this episode, Mark Hebner discusses whether or not your retirement is being taken care of correctly. Joining him in the discussion for an inside look at 401(k) plans is IFA’s COO and a qualified investment advisor, Ben Brinkerhoff. Ben brings a unique insight to the subject of 401(k)s as he discusses his experience with plan participants, sponsors, trustees, and the all-to-deceptive provider. 
 
As a plan participant, employees should be unequivocally concerned with the asset allocation of their retirement plan. As an employee, if your retirement plan is unknown to you or poorly performing, a visit to your HR department is in order. You should seek passively managed options through index funds with a low cost structure. Expense ratios can easily distinguish the active funds from the passive ones. Without these options available in your 401(k) plan, some good old fashioned grass-rooted complaining is certainly the subsequent step. 
 
As a plan sponsor, the concern for the health of the employees’ plans also falls on the corporation’s, or plan trustees, part. If you are a plan sponsor, are you familiar with the details of the plan offered by your provider? Further, are they an ERISA 3(38) fiduciary? This is important. An ERISA 3(38) fiduciary assumes the responsibility for the decisions made to invest the plan participants in certain funds. ERISA 3(38) fiduciaries cannot have a vested interest in the funds they advise for clients separating the managers performing with luck from the managers acting in the best interest of their client’s assets. Furthermore, this agreement allows prudent sponsors who do not have the expert investment skills and abilities to delegate the responsibility to an expert entity. Without a 3(38) agreement, the consequences or litigations fall under the plan sponsor. Scary, but that is reality. If you are unaware of the explicit expenses of your plan provider, you are not alone. In other words, don’t be this guy: “I was told the services and plans were free.” We live in a world of deceptive practice and convolution. To ensure the 401(k) plans are properly managed, the provider must be confirmed as an ERISA 3(38) fiduciary on paper. Sure, the provider may be assumed to be the expert on investing in the business relationship, but the hard truth is that the firm will be able to escape any responsibility for the advice given simply by slipping the right words into the small print of the disclosures. If the plan sponsor is to act in the best interest of its employees, these concerns must be addressed.
 
In the end, know what you’re investing in, where your money is, whose hands it’s in, and how much you’re paying for the 401(k) plan. In the long run, the safest option is to invest in index funds with low cost expense ratios.  After all, your retirement should be comfortable and not be funding the active manager’s annual vacation to the Cayman Islands.

 

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