Archives for September 2011

Why Investment Advice Isn’t Always “Investment Advice”

Common sense sometimes flies out the window in the regulation of retirement plans. For example, investment advice isn’t always considered “investment advice” under the Employee Retirement Income Security Act of 1974 (ERISA). Assistant Secretary of Labor Phyllis C. Borzi explained this in testimony delivered on July 26, which appeared in an edited format in Investment News.

ERISA says people who deliver investment advice to private-sector employee benefit plans are fiduciaries with all of the related responsibilities. This includes defined contribution retirement plans such as 401(k) plans. But there’s a whopping flaw in the Department of Labor (DOL) rule that defines investment advice. ” … [A]dvice about investments is not considered … ‘investment advice’ merely because, for example, the advice was only given once, or because the advisor disavows any understanding that the advice would serve as a primary basis for the investment decision,” Borzi said in her testimony. This meant many advisors could avoid fiduciary responsibility, which resulted in conflicts of interests that have hurt plan participants.

The DOL proposed a new regulation to fix this weakness. Published on October 22, 2010, the regulation is currently under discussion.

Smart Investor agrees with Assistant Secretary Borzi that, ” … there is strong evidence that unmitigated conflicts cause substantial harm and … that the proposed fiduciary regulation would combat such conflicts and thus deliver significant benefits to plan participants and IRA holders.”

If you’d like to learn more about fiduciary challenges or how to manage your company’s 401(k) plan in the best interests of all participants, contact us at 916-435-2100.

You Pay More for Your 401(k)

Participants in smaller 401(k) plans pay higher expenses on average than participants in larger plans, according to study results announced in a press release by Financial Research Corporation (FRC). But this may change as the result of greater awareness of costs.

“The average participant-paid costs as a percentage of assets for the smallest plan groups was more than three times those of the very largest plans,” said FRC. Even small differences in expenses can make a big difference in 401(k) investors’ long-term returns, as Smart Investor has discussed in “One Percent Can Make a BIG Difference to Your 401(k) Plan Participants.”

Here’s an even more disturbing fact, cited by Leslie Prescott, the FRC study’s author: “…comparably-sized plans within an industry often had substantial differences in the actual dollar amount of annual fees that a participant would pay, amounting to hundreds and even thousands of dollars a year.” This suggests that the higher-paying participants’ plan sponsors didn’t research and hire competitively priced providers.

Cut 401(k) Plan Costs Today

If your plan participants are paying above-market fees for comparably sized plans, you can fix that.

For starters, you can ask your current providers about more competitively priced approaches. Also, conduct research on plan providers and their offerings. Don’t automatically pick the cheapest plan. Remember, sometimes you get what you pay for, as Smart Investor discussed in “Should Your 401(k) Plan Pick the Lowest-Cost Investment Provider?

Costs May Fall with More Fee Disclosure

Pressure is ratcheting up on 401(k) providers to offer more attractively priced plans ahead of the Department of Labor’s requirement for better disclosure of fees. Stay tuned for more developments!

If you’d like to discuss how to set up an economically priced, hassle-free 401(k) plan for your company, contact us at 916-435-2100.

Your Employees Need Your 401(k) Encouragement

Simply setting up a 401(k) plan isn’t enough. You need to educate your employees, too. At least that’s what Smart Investor takes away from statistics on the gap between the amount people need for retirement and what they’ve actually saved in their 401(k) plans.

A mere $71,500 was the average 401(k) balance across 11 million Fidelity accounts at the end of 2010. This may sound big compared to your employees’ salaries. However, it compares unfavorably with the estimated $740,000 “needed to deliver an annual income of $50,000 per year for 25 years, assuming a 5% rate of return and no inflation,” according to’s “25 Shocking but True Statistics About Retirement.” Increase the inflation expectation to 5% and your employees will need to almost double their savings to $1.25 million to reach the same income goal, according to the same article.

Of course, it’s unlikely that all or even most of those Fidelity account holders were near retirement age. So they had some time to build their assets.

Indeed, “For participants who were continuously active for the past 10 years, their average balance increased to $183,100 at the end of last year from $59,100 at the end of the fourth quarter 2000,” according to a Fidelity press release. That number is more encouraging. However, it still suggests a gap between actual savings and eventual needs.

If you’d like to discuss how to set up an economically priced, hassle-free 401(k) plan for your company, contact us at 916-435-2100.