The Retirement Plan Sponsor’s Seven-Step Guide to Picking 401(k) Plan Providers

Starting a retirement plan from scratch is time-consuming for plan sponsors. This is frustrating for executives who’d rather focus on running their business.

Plan sponsors who want to select plan providers on their own should make sure they follow the seven-step process outlined in the table below.

If you’d rather get help, then find a fee-based financial advisor with the right experience and expertise. Look for an independent fiduciary who meets the standards listed in the right-hand column of the table below.

Retirement Plan Selection Steps and How an Independent Fiduciary Can Help

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If you’re a plan sponsor in Sacramento, Roseville, or Stockton, CA who’d like help with the complexities of provider selection, contact us at 916-435-2100. You don’t have to go it alone.

The AIFA Credential and Successful Retirement

AIFA® stands for Accredited Investment Fiduciary Analyst™ and it’s a sign that your financial advisor pursues the highest possible standards of fiduciary excellence. Retirement plan sponsors who want to do right by their employees should seek a financial advisor who holds the AIFA designation.

AIFA® and Your Company’s Retirement Plan

Your employees have a better chance of retiring with dignity if your defined contribution retirement plan is overseen by a holder of the AIFA. Why? Because if your plan is managed properly, there’s a higher likelihood that the plan will deliver good results.

AIFA designees apply the rigorous best practices for 401(k) plans that have been developed by the Centre for Fiduciary Excellence (CEFEX). CEFEX has put these best practices into an easy-to-use format to ensure consistency and improve the overall retirement plan fiduciary decision-making process.

You may be familiar with ISO standards for ensuring manufacturing excellence. AIFA credential holders bring the same high standards to systematically and efficiently reviewing your 401(k). It’s important to be systematic so we don’t miss any problems. Efficiency helps us keep costs low.

AIFA Designee Strengths and Fiduciary Standards

Here’s how fi360, which provides training for the AIFA designation , sums up the AIFA designee’s strengths:

AIFA designees’ primary function is to perform, or assist in, assessments of an Investment Steward’s, Advisor’s, or Manager’s conformance to a Global Fiduciary Standard of Excellence using fi360’s ISO-like procedure of assessment. AIFA designees possess the ability and knowledge to advise clients of deficiencies in investment processes. It is also the required mark to perform a CEFEX Fiduciary Certification, the independent recognition of a fiduciary’s conformity to all fiduciary Practices and Criteria.

Not just anyone can become an AIFA designee. They must:

  • Satisfy educational and work experience prerequisites, including earning the AIF designation
  • Complete specialized training and pass a comprehensive examination
  • Annually complete 10 hours of continuing education
  • Abide by a code of ethics

Your retirement plan can benefit from this deep expertise.

Looking for an AIFA designee serving Sacramento, Roseville, and Stockton, CA? Smart Investor serves all three cities from our base in Rocklin, CA. Contact us at 916-435-2100.

Key Questions for Your Retirement Plan Provider, Including the F-Word

Retirement plan providers all talk a good game. Plan sponsors need to ask smart questions to identify the best candidates. To help you, Smart Investor will present a series of posts listing key questions for your potential providers. Today’s post focuses on questions about services such as investment advice, education, participant communications, recordkeeping, and custody.

To fulfill your responsibilities under ERISA, the Employee Retirement Income Security Act governing retirement plans, you must understand in detail the specific services your vendors offer. So, ask the candidates, “What specific services do you provide and who will provide them?”

Walk away if your potential provider won’t answer your questions in detail. The Department of Labor requires them to provide this information in writing before you engage them.

Use the F-Word for the Best Retirement Plan

The following question is critical: “Are you a fiduciary and do you accept fiduciary responsibility in writing?” A fiduciary advisor upholds the highest standards, acting in the best interests of plan participants and beneficiaries.

Not every provider is a fiduciary. Many are not as we discussed in “The Secret Your 401(k) Vendors Don’t Want You to Learn: ‘Co-Fiduciary’ Doesn’t Mean Much.”

Hiring a fiduciary, especially a registered investment advisor who acknowledges status as an investment manager under ERISA Section 3(38) is best. This lets you delegate your fiduciary responsibility and liability to the advisor. Delegation is becoming more important as lawsuits for breach of fiduciary duty become more common.

Get the details on investment providers, recordkeepers, custodians, TPAs

Most providers work as a team with others, such as recordkeepers, custodians, and third-party administrators. Don’t assume those others also act as fiduciaries. Ask for the names of the companies, the services they’ll provide, and whether they will act as fiduciaries.

The list of services should also address whether the companies offer the following:

  1. Personalized one-on-one enrollment and fiduciary investment advice services for each of your participants
  2. Model investment portfolios, including a summary of their fund allocations, investment performance, expected rate of return and risk level
  3. On-line and 24/7 voice response system that allows participants to view and make changes to their accounts
  4. Participant communications and advice to help employees get the most out of the retirement plan
  5. Agendas and meeting minutes for your plan sponsor/trustee meetings with documentation demonstrating that you, the plan sponsor, is meeting your plan responsibilities

In future blog posts, Smart Investor will cover more important questions that plan sponsors must ask.

Looking for a registered investment advisor serving Sacramento, Roseville, and Stockton, CA? Smart Investor serves all three cities from our base in Rocklin, CA. Contact us at 916-435-2100.

After Occupy Wall Street, Occupy 401(k)?

Retirement plan sponsors, beware! The anger that fueled Occupy Wall Street and, closer to home, Occupy Sacramento and Occupy Stockton, could spread to the 401(k) world.

You may think Smart Investor is kidding. But we’re not.

Consider this statement by respected financial columnist Ron Lieber: “…people who are lucky enough to be employed and have a retirement plan ought to be staging a sit-in in the office of the person who runs that 401(k) plan. He made this comment in “5 Ways to Think About Nuisance Fees” in The New York Times (Nov. 18).

401(k) Plan Fees Worse than Bank of America Debit Card Fees

Lieber was comparing the impact of excessive 401(k) fees with the impact of Bank of America’s unpopular monthly fee for debit card users, which was ultimately cancelled in response to protests. From Lieber’s perspective, “However symbolically irritating Bank of America’s move was, we focus on smaller fees at our peril. The biggest potential hit on the fee front probably comes from your investments, where mutual fund fees can quietly rob you of enormous piles of money over time.”

We don’t believe Lieber is fomenting a new Occupy movement. But he makes a good point. Most consumers and retirement plan participants aren’t aware of the high mutual fund fees that sap their investment returns. Once they learn, they may get riled up.

Retirement Plan Expenses to Be Revealed in 2012

Right now it’s hard to cut through the verbiage obscuring the fees that plan participants pay for their 401(k)s. But that will change in 2012 when plan sponsors will be required to share expense information with employees in an easy-to-understand format.

Employees are likely to be upset when they learn they’re paying high fees and earning subpar returns. This is a good time for employers to clean up their 401(k) plans, so they get ahead of employee outrage.

Sacramento-Stockton-Roseville 401(k) plan sponsors, Smart Investor would like to help you boost your employees satisfaction with your companys 401(k) plan. Contact us at 916-435-2100.

Your Employees Appreciate Your Company’s 401(k) Plan

Every employer likes to feel appreciated. So you’ll be happy to learn that employees appreciate that you offer a 401(k) plan, as reflected in results of repeated surveys conducted by the Investment Company Institute (ICI).

A whopping 92% of participants agreed with the following statement, “My employer-sponsored retirement account helps me think about the long term, not just my current needs.” As ICI President John Schott Stevens pointed out, “You don’t see majorities like that for most propositions that are tested in surveys—particularly not for a system that has taken some very hard knocks from the press and some policymakers.” Stevens discussed this statistic in his speech on “Helping Working Americans Achieve A Financially Secure Retirement: How the 401(k) System Is Succeeding.”

In a world where short-term thinking seems common, inspiring your employees to think about the long term is a valuable contribution. That’s even before you consider the value of offering a well-diversified, economically priced range of investments in an account with automated contributions.

Add the incentive of an employer match and you’ve got a winning proposition for your employees, which also fulfills your responsibilities as a 401(k) fiduciary.

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.

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.

Social Security and Your Employees

Social Security is important for your employees’ retirement. If you’d like to learn more, check out Fast Facts & Figures About Social Security, 2011, a publication of the Social Security Administration. It’s a handy reference guide. It also raises some concerns about Social Security’s long-term survival.

More than 80% of the 65+ set collects Social Security

Based on the experience of past generations, you’re likely to receive benefits after you retire. Many Americans aged 65 or older rely on Social Security for more than half of their income. Here are the details from Fast Facts:

In 2009, 88% of married couples and 86% of nonmarried persons aged 65 or older received Social Security benefits. Social Security was the major source of income (providing at least 50% of total income) for 54% of aged beneficiary couples and 73% of aged nonmarried beneficiaries.

The average person receives a modest monthly average payment. It averaged $1,323 for retired men and $1,023 for retired women as of December 2010.

You may not be aware that the age at which you’re eligible for full Social Security benefits is rising. It’s age 65 only for persons born in 1937 or earlier (see page 2). It rises to age 67 for those born in 1960 and later.

Worker/retiree ratio falling

Social Security does face a challenge. The ratio of workers to retirees is falling. This means there will be fewer people paying Social Security taxes for each retiree. In fact, the ratio is expected “to fall from 2.9 to 1 in 2010 to 2.1 to 1 in 2029,” according to Fast Facts. Starting in 2010, Social Security paid more in benefits and expenses than it collected in taxes.

This is a good reason for you and your employees to pay more attention to your retirement plans.

If you’d like to learn more, contact us at 916-435-2100.

Law Firm Fears 401(k) Plan Fee Lawsuits

Respected law firms are worried about your getting sued if your 401(k) plan participants pay hidden or excessive fees.


“Participants want to sue you! Yep, that’s right.” This is an important point made by Keith McMurdy, an attorney with the 100-year-old, 500-member law firm of Fox Rothschild. Why? Because you’re failing in your fiduciary duty if you do not ensure that your plan participants pay only reasonable fees. He opined in “To fee or not to fee, that is the question,” in the Employee Benefit Advisor.

Smart Investor agrees with McMurdy. If you don’t take your fiduciary duty seriously, you’re putting yourself at risk. This is a theme we’ve discussed in many other blog posts, including “Lawsuit Target: 401(k) Plans Operated by Insurance Companies” and “Fiduciary Court Cases Raise Stakes for 401(k) Plan Sponsors Who Buy Retail.”

But there’s good news, too. You can start to protect yourself by analyzing plan fees and documenting your analysis. Following McMurdy’s suggestions to make a chart of all fees and costs associated with your employee benefit plans is a good starting point.

As McMurdy says, “Once you know how much and who pays, you can then start evaluating whether the fees are too high and whether you can take steps to minimize the impact on participants.”

If you’d like help assessing the fees paid by your 401(k) plan’s participants, contact us at 916-435-2100.