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Board Members – You might be on the hook for more than you thought.

Board Members – You might be on the hook for more than you thought.

Investment Committees and Boards of Directors as Fiduciaries of Retirement Plans.

Recently, we met with the executive director of a non-profit organization to review the benchmark and fiduciary process analysis we performed on their 403(b) plan.  During our conversation, he paused, took a breath and said, “This is really powerful information, and clearly we have significant improvements that need to be made.” Although we completely agreed, there sounded like there was a “but” in there somewhere…and we were correct.  He continued to say “But, how am I going to get the members of the board on the same page so we can make the necessary changes and what will keep us from ending up in this position again in three years?”.

He is right to be concerned.  Being a member of a board or investment policy committee is a big responsibility.  Members commonly are considered fiduciaries with respect to the organization’s retirement plan, meaning they have a legal obligation to ensure the plan level decisions are in the best interest of the participants.

For participant-directed plans, like 401(k) and 403(b) plans, the investment fiduciaries have the responsibility to prudently:

  • Select the investment options
  • Monitor those options
  • Remove a fund when it is deemed necessary, and replace the fund if needed

In addition:

  • Together, the options must constitute a “broad range”
  • The options and the plan’s services must be suitable and appropriate for the participants
  • The costs of all services for the plan, including the investment expenses, must be reasonable

The standard to which their decisions are held is the Prudent Expert Rule – which requires that investments be selected:

“. . . with the care, skill, prudence, and diligence . . . that a prudent man acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims. . . .”

It’s all about the process

Many of the issues we see could be fixed if there was a written policy in place for the board or committee to reference.  In many instances, we find the boards and committees are comprised of highly intelligent, committed individuals, however, they are not investment or qualified plan experts.

An effective written policy should: 1) Be written in language that can be understood and followed by a non-investment professional. 2) Be well defined, but not so restrictive that it can’t be reasonably adhered to 3) Include a monitoring schedule that compares results against established benchmarks. By having that process in place and following it, the group removes the guesswork, limits liability and increases efficiency. The document that details the process is called an Investment Policy Statement or IPS.

According to the Center for Fiduciary Studies:

An Investment Policy Statement (IPS) is a written document with the purpose of providing meaningful direction and guidance for trustees and investment professionals regarding the selection and management of investment assets based on established and documented investment goals and objectives. When used properly, this document can limit liability, provide consistency, and set expectations for investment performance.

By preparing a written IPS, the fiduciary can: 1) avoid unnecessary differences of opinion and the resulting conflicts; 2) minimize the possibility of missteps due to lack of clear guidelines; 3) establish a reasoned basis for measuring their compliance; and 4) establish and communicate reasonable and clear expectations with participants, beneficiaries, and investors.

Once an IPS is implemented, the role of the committee or board is no longer one based on opinion or guesswork. A well crafted IPS document is written in plain language so that an average person, who is not an investment expert, can follow it as a guide. From a practical standpoint the group now knows exactly what they should be receiving and reviewing from vendors on a quarterly and annual basis and they should have an easy to follow procedure to see if any changes are warranted. The IPS itself is a living document and should be periodically reviewed to see if it is working as intended and adjusted accordingly.

If your organization is board-centric or utilizes an investment committee for your qualified retirement plan and you do not have a written, clear process for plan monitoring and evaluating; it’s a good time to begin that discussion.

There has been more focus on fiduciary responsibility with respect to 401k and 403b plans in the past year than ever before with the passing of a new Fiduciary Rule by the Department of Labor this past April. The good news for your board or committee is, although it takes some work to establish a well written and documented prudent process, it makes the job of those in the group easier, helps limit their liability, increases the effectiveness of the plan and often reduces costs. All well worth the effort in our opinion.

Am I really going to get sued over my 401k fees?

Am I really going to get sued if my 401k fees are too high?

The financial news is not often “abuzz” with stories about the 401k industry.  In fact, The Department of Labor’s (“DOL”) fiduciary rule, one of the biggest pieces of landmark legislation related to qualified retirement plans, was passed in April of this year and the media’s coverage was underwhelming at best.  Simply stated, it requires that by January 1, 2018, anyone giving plan advice or selling a product must now act in a fiduciary capacity – implicitly putting the best interest of the plan and the participants before their own. For some more detail on the new ruling click here to read our May 24th, 2016 Fiduciary File.

The media however, seems to like the news stories that include big names and law suits. Recently, some fairly well-known names including New York Life, Morgan Stanley, Safeway and Duke University have all found an unflattering place in the media spotlight because of lawsuits related to excessive 401k fees.

Can my employee’s really sue me for excessive fees?

We are not attorneys, nor do we provide legal advice, however the short answer is – Yes.

The simple truth is as an employer offering a 401k plan for your employees, you are held to a fiduciary standard of care. That means you must put your participants’ best interests before your own, and operate in a prudent manner exercising proper due diligence. If you fail to meet that fiduciary obligation, you are liable – personally. And that goes for all parties who are fiduciaries to the plan.

There are a myriad of ways you might breach your fiduciary obligations to your plan if you are not careful and prudent. The recent uptick in law suits specifically deal with high fees in the absence of increased performance. According to Bloomberg BNA “Workers have used litigation to challenge 401(k) fees for more than a decade, but the frequency of these lawsuits recently picked up steam. Since September 2015, more than a dozen lawsuits have been filed challenging the fees paid by 401(k) plans of large companies like Intel Corp.Anthem Inc.Verizon Communications Inc. and Chevron Corp.

However, these suits have not been limited to just mega companies.  Plans as low as $9 million in assets have made the news lately for the very same reason. Many legal experts in the field predict that over the next few years, we will see the average size of the plans brought to task on this issue drop dramatically.

How big a deal is this issue in real dollars?

The math is fairly simple on this issue. There are four main sources of fees that must be paid to various providers in a 401k plan: Fund Expenses, Custodial Expenses, Administration Expenses, and Advisor Fee / Brokerage Commissions.


Let’s use a 35-year-old employee making $40,000 per year. The employee currently pays 2% per year for all of the expenses associated with the 401k plan.  However, a similar plan with the same investment choices and services is available for 1% per year.  The employee starts with $1,000 in their 401k account and has a 10% salary deferral per year for 30 years earning an average rate of return of 6% before expenses. The employee will end up with about $232,000 in the plan at the 2% expense rate. However, the same employee, deferring the same amount, in the same investments, will end up with about $277,000 in the plan with a 1% expense rate. This is a $45,000 difference.

This example highlights one employee with a modest salary.  Multiply this by the number of employees and you’ll see how big the dollar amount can be!

Ok, but am I really likely to get sued?

According to BNA Bloomberg “This universe is anything but small: Nearly 75,000 401(k) plans have $25 million or fewer in assets, and more than 4.2 million workers have their retirement savings in these plans, according to recent data from the Employee Benefit Research Institute. Research shows that these smaller plans typically carry higher fees than larger plans that can use their size as leverage to negotiate better deals, making them vulnerable to lawsuits claiming excessive fees.”

So the answer is, the likelihood of being sued is possibly higher in this climate than in years past; however, we don’t believe that is the big take-away here. What’s not good for the participants, in turn, it is not good for you either.

Complex issue – simple solution

It would be easy if all plans and investments were created equal – just pick one with good service at a good price and be done with it, right? Unfortunately, It’s not that easy.

“Is my plan too expensive?” The answer is … wait for it … “that depends”. The services your plan needs, the investment options, the level of assistance, the success of your participants and a laundry list of other factors come into play when determining whether or not your plan is too expensive.

Consider our example above. If the investment choices, education and advice available in the plan that costs 2% in expenses enabled the employee to earn 8% instead of the 6% in a plan that only cost 1% – so long as it is a similar level of risk, the 2% expense plan is actually a better deal by 1%.

The DOL and the Center for Fiduciary Studies suggest a benchmark analysis on retirement plans every 2 to 3 years is a best practice for plan sponsors.  A detailed benchmark analysis will not only quantify all the fees you are paying and who you are paying them to, it will also measure those fees against the current services and performance of the plan. Periodic benchmarking is part of a sound, prudent process – and a clearly defined and executed process is what is defendable.

You probably don’t need the cheapest plan, though the goal should be a reasonably priced plan with great service and great performance. However, you do need clear documentation of the process you use to make plan level decisions about vendors, design changes, investment changes; combined with a paper trail proving that the process is being monitored and executed on a regular basis.

So, should you really be worried about your employees suing you because their 401k fees are too high?  Maybe……but probably not. Should you be concerned that the fee’s, performance, design and utilization of your current plan are costing your employees and you a significant amount of money year after year even though your plan might not feel broken? Absolutely. If you don’t know exactly what you are paying and exactly what you are paying for, it’s time to find out. It is no doubt a complex issue, but the first step is simple – get the facts.




New DOL Fiduciary Rule – Butchers and Dieticians

New DOL Fiduciary Rule – Butchers and Dieticians

We were talking to a client last week and he asked about the new Department of Labor (“DOL”) Fiduciary Law he recently read.  We explained, in a nutshell, the new regulation requires all retirement plan advisors to put the best interest of the plan sponsor and the employees first.  To which he immediately asked, “Wait, you mean they didn’t already?”  The short answer is “It depends.”  (This is rarely the beginning of a short answer.)

Let’s start with the definition of a fiduciary. Investopedia defines it as follows:

A fiduciary is responsible for managing the assets of another person, or of a group of people. Asset managers, bankers, accountants, executors, board members, and corporate officers can all be considered fiduciaries when entrusted in good faith with the responsibility of managing another party’s assets.

Read more: Fiduciary Definition | Investopedia 

When acting in a fiduciary capacity, you are required by law to put the best interests of the party you are acting on behalf of before your own. One of the basic tenants of care when acting as a fiduciary is that you must eliminate or minimize conflicts of interest. It is both an ethical and legal position of trust with the highest legal standard of care.

401k advisors currently fit into one of two basic categories: Broker or Fiduciary Advisor

Today, many of the 401k professionals function in a sales capacity under a brokerage arrangement. Their compensation is in the form of commissions and varies from product to product.  In some cases, the compensation can be affected by the investment selections within the product.  A broker’s job is to sell a product that is within your means and meets your needs. The standard they must meet is called “suitability.”

A Fiduciary Advisor receives no compensation from the plan’s vendors and works on a revenue neutral basis – meaning they receive no differential in compensation based on product selection, this is commonly called a fee-based arrangement. A fiduciary’s focus is primarily on process rather than product. The process of vendor selection and monitoring must be well thought out and documented so that the plan sponsor can provide product(s) selected to meet the specific needs of the plan and its participants on an ongoing basis.

Butchers and Dieticians 

Full disclosure on this analogy – we like butchers and we like dieticians, but for different reasons. Think of it this way…if we go to the local butcher shop, their job is to sell us the meat they have in their store. The meat is most certainly regulated by the US Food and Drug  Administration (“FDA”); however, the FDA does not require the butcher to disclose that the same meat is on sale at Price Chopper, nor do they have to reveal that Hannaford may have a better quality burger.  We don’t expect the butcher to do this either.  Additionally, unbeknownst to us, the butcher may have an incentive from the manufacturer to sell more of a certain meat this month.  We would never expect them to tell us to “lay off the red meat and opt for the grilled veggies at the farmer’s market.” That’s not their job and it’s not what they get paid for.

Conversely, if we go to the doctor or a dietician, their job is to look at all the facts and recommend a diet which is in our best interest to keep us healthy. That’s why we go to them. They don’t receive an incentive from the local grocery store for promoting fruits and vegetables. We pay our bill for the office visit or consultation, but the amount we pay is not impacted by the food recommendations they make.

While the brokerage world is more like the butcher, fiduciary advisors are more are like the dieticians. The advisor’s compensation is not based on the product that is used, rather it is based on the advice and services they provide. This idea is not new in any way.  In fact, firms like ours have operated this way for years.

Holding all advisors to a higher standard

With the passing of the new regulation by the DOL, all 401k professionals will have to meet the fiduciary standard. The broker / salesperson role will no longer be an option. Moreover, the criteria to determine whether or not they are acting as a fiduciary has been broadened significantly.

So, back to our client’s question. No – professionals operating in a sales capacity under a brokerage arrangement are not currently required to put your best interest first – at least until the new law is fully inforce by January of 2018.

So how can you tell if the product you have today is in the best interest of you and your employees?

There is a basic scientific axiom that says in order to improve or manage something, you must be able to measure it. It is a fiduciary best practice to have your plan benchmarked against plans similar to yours on a regular basis by a third party. This benchmark also gives you the ability to gauge the health of your plan and identify any shortfalls that need to be shored up.  An independent benchmark analysis should include at a minimum: a comparison of all of the fees you are paying, an analysis of the investment lineup, and a review of your plan features and plan design. More advanced benchmark analyses will include an evaluation of how your employees are utilizing the plan, including participation and deferral rates and average investment allocations based on age.

So will the new regulation affect me?

You might be asking how, when, or if this new law will specifically affect your plan since it really is directly talking about the advisors and not the plans themselves. The retirement plan industry has changed fairly significantly over the past several years. For example, because of another DOL ruling a few years back, fees are now more transparent than they once were and fees on new plans have been dropping as a result. We expect over time with this new ruling we will see more fee compression and even more transparency – we see this as a very positive step for the industry, plan sponsors and participants.

For plan sponsors, possibly one of the most powerful effects of this new regulation is simply an increased awareness that they are ultimately responsible, under the highest standard of care, to make sure their plan is in the best interested of their employees. Moreover, simply relying on their current service providers may not be enough to ensure that.

Additional resources on Investopedia:

Suitability vs. Fiduciary:







401k sponsors – survey shows you might be missing the boat..

401k sponsors – survey shows you might be missing the boat.

A recent survey conducted by TD Ameritrade found 401k sponsors that utilize the services of a RIA are more likely to hold their fiduciary duties to a higher standard.  The survey findings indicate RIAs are more likely than brokers to provide services such as participant level advice, fiduciary support and plan sponsor education for retirement plans.

The National Association of Plan Advisors published an article earlier this month that gives some perspective on the TD Ameritrade survey.  One notable item is the fact that there has been a considerable increase in the number of plans that use the services of a RIA however more than 75% of the plans surveyed were not using a RIA as the plan advisor. 

If you offer a 401k plan to your employees, this article is worth a read.  It may be time to think differently when it comes to the advice you are getting, or not getting, on your plan.

Here is the link:

CFO – The unsung hero of the business (and the 401k) world.

CFO – The unsung hero of the business (and the 401k) world.

When a company makes a big announcement about their latest and greatest achievement, it’s usually not the CFO that gets their name in the press. Behind the scenes, all of those great achievements likely could not have happened without the financial house being kept in perfect order by the CFO, who may not even get a mention.

We recently had the privilege of attending the Albany Business Review’s CFO of the Year Awards ceremony. Each of the CFOs recognized were asked to speak briefly about what inspires them to do the great work they do every day. Now, CFOs are typically thought of as number crunchers, all-business and as one of the awardees half-jokingly said, “The ones you go to – to be told no.” However, our biggest take away from the event, having listened to about a dozen CFOs speak, was that they care deeply about the company and its employees. These “number crunchers” have big hearts and huge responsibilities.

If money is the life-blood of each company, then the CFOs literally have their fingers on its pulse and this includes the 401k plan. They often have the responsibility of ensuring that their company has a plan that is in compliance, has low fees, high performance and features and investment choices that are specifically designed to meet the needs of their employees. In a rapidly changing world of 401k regulations, investment options and compliance, that is no small task.

Recently there was an article on that shed some light on several issues that we often see CFOs facing when having conversations about their 401k plans. It covers some easy to implement best practices, advice on understanding fees and dealing with compliance issues.

Even if you are not a CFO, but part of your responsibility is your company’s 401k plan, is it’s worth a careful read. If, after you read the article you have questions we would be happy to be a resource for you, just call or email.

Read the artciel on here:

NPR – Is Wall Street Eating Your 401(k) Nest Egg?

The Fiduciary File: NPR – Is Wall Street Eating Your 401(k) Nest Egg?

High fees are eroding the retirement savings of millions of Americans, but employers who shop around can often find much better options for their employees’ 401(k) plans.

by Annette Elizabeth Allen/NPR

Americans collectively are losing billions of dollars a year out of their retirement accounts because they’re paying excessive fees, according to researchers studying thousands of employer-sponsored retirement plans across the country.

The rearchers say part of the trouble is that many employers that offer 401(k) plans to their workers are outgunned by financial firms that sell them bad plans loaded with hefty fees. That’s especially true, they say, for small and midsize employers that don’t have much financial expertise in-house.

At a manufacturing firm in Minnesota, Justin Johnson, a new employee, is enrolling in the 401(k) plan. He has two kids, and his fiancee is going back to school. Money is tight, but he wants to save for the future.

He’s on the phone with a financial adviser that the small company, named MITGI, uses to walk people through the process. The adviser didn’t want to do a recorded interview, but he let us join in on the speakerphone call when we visited the company to report our story. “So what are the fees like in this plan?” Johnson asks the adviser. It’s an important question because high fees can badly damage your ability to make money over time.

Eric Lipke, the president of MITGI, says he hired a financial adviser to set up a 401(k) plan for his 55 workers because he wanted to provide good benefits. The small Minnesota firm offers to match contributions, which behavioral economists say is a great way to encourage employees to save. But Lipke says he’s not sure if the plan’s investment options and the fees are good or bad.

The fees in this retirement plan make it “extremely competitive,” says the financial adviser, who is with EFS Advisors in Cambridge, Minn. That sounds good. But it doesn’t appear to be true. Federal disclosure documents show the fees are more than three times higher than other plans available to employees at companies like this one, according to Ian Ayres, a law professor at Yale Law School.

“He misrepresented the truth,” says Ayres, who studies 401(k) plans. We asked Ayres if making such a claim is even legal. “No,” he says, “to misrepresent the truth in that way is almost certainly not legal.”

A Pattern Of Excessive Fees

Ayres says MITGI got saddled with a bad set of investment options that’s taking way too much out of the workers’ savings. And he has seen this before. Ayres has analyzed 401(k) plans at thousands of companies across the country. “Sadly, the high-costness is both outrageous and all too prevalent,” he says. “There are billions of dollars in excess fees being charged each year to American workers.” And, Ayres says, smaller companies are more likely to have overpriced 401(k) plans.

The problem is that many people running small and midsized companies are not very good at setting up 401(k) plans for their workers. And that’s somewhat understandable. They don’t know much about saving and investing. They’re in business because they’re really good at other things.

Experts say that sitting down and creating a plan of action makes us 10 times more likely to achieve our goals — especially if we tell friends about our plan to create some gentle social pressure to follow through. Here’s a worksheet to help with that.

“We make tools that are smaller than a human hair in diameter,” says Eric Lipke, the president of MITGI, which stands for Midwest Industrial Tool Grinding Inc.

The Hutchinson, Minn., company manufactures tiny drill bit-type tools used to make pacemakers and other medical devices. Lipke oversees the company’s 55 employees. And he says the firm wants to offer good benefits so it can attract and keep good workers.

“To come and work here for 20 years, 30 years, whatever their working career is, and when they’re done be able to say, ‘You know, I had really good health care, I have a great retirement plan,’ ” Lipke says.

But five years ago, when he went to set up the 401(k) plan, nobody at this company knew anything about how to do it. Lipke needed help. He asked business people running other local companies if they knew a good financial adviser. Somebody recommended this one with EFS Advisors, who said he could set up a good plan for the workers. “We chose him and he did set up the plan, and all but one employee participated right away from the beginning,” Lipke says. “So it was something people liked.”

But Lipke realized he still has no idea whether he ended up with a good 401(k) plan for the workers. “We don’t have a really good benchmark to know how good it is or not,” he says. “We don’t know where to find help for that.”

So, as part of this NPR series “Your Money and Your Life,”we found Lipke some help. We put him and his new human resources director, Sheila Murphy, in touch with another professor who studies all this, Kent Smetters, an economist at the University of Pennsylvania’s Wharton School.

Between Bad And Ugly

Smetters studies 401(k) plans and does a personal finance radio show. We asked him to take a look at MITGI’s plan, including fee disclosures and other details. Murphy and Lipke then called him and asked him basically whether their plan was good, bad or ugly.

“I would put it between bad and ugly,” Smetters told them.

“Oh!” said Murphy, dismayed.

“I think I’ve seen worse but not by much,” Smetters said. “This really is a high-fee plan.”

The disclosure documents for the plan show that the workers at the company are paying about 2 percent in fees. That might not sound like much. But Smetters says it’s really high.

Two percent of your entire life savings every year, compounded over long periods of time — 30 or 40 years — eats up half the earnings on the money you invest. So Smetters says this plan is sucking way too much money out of the employees’ pockets. But, he says, “the good news here is there’s a great opportunity here for shifting to a 401(k) plan” that will deliver a higher return over time.

As for EFS Advisors, the firm declined repeated requests for an interview or a comment. But Sarah Holden, a research director with the trade group the Investment Company Institute, says studies finding that many 401(k) plans are overpriced have focused primarily on fees. But, she says, “what none of the studies have done is look to see what was the range of services that were being included.”

So, for example, one plan might cost more than another, but employees might get more access to financial advisers in the more expensive plan. Of course, many plans could still be way overpriced. But Holden says basically businesses need to shop around.

“It’s their job”, she says, to make sure that the fees they’re paying for the services they’re getting “are reasonable.”

Shopping Around

When he spoke with the managers at MITGI, the Wharton School’s Smetters suggested a few reputable financial firms for them to contact that might have plans with competitive prices.

Smetters says MITGI made the same mistake that many other businesses and individuals do. Many people find a financial adviser just by asking friends for a recommendation. This is what we humans do, right? Anybody know a good plumber? Anybody know a good financial adviser?

But Smetters says this is not the best approach. Somebody who has “financial adviser” written on a business card, often “he’s not only a financial adviser,” Smetters says. “He’s also a sales guy who is recommending that your 401(k) plan use funds that have high expense ratios because that’s how he ultimately gets paid.”

That’s why Smetters says he recommends that people and businesses only use what are known as “fee-only” advisers. By law, a “fee-only” adviser must place your interests first and not accept hidden commissions from mutual funds, insurance companies or anyone else. In other words, they don’t get kickbacks for steering you into high-cost mutual funds.

Murphy, the HR director, has now heard back after shopping around for a better deal for the workers at MITGI. She contacted three financial firms, and one, a major firm, gave her a quote for a plan with total fees of 0.64 percent. Her current plan is about three times more expensive.

The new fiduciary rule – Washington has your best interest on this one… no, REALLY.

The new fiduciary rule – Washington has your best interest on this one… no, REALLY.

As an employer offering a 401k plan, there is a battle going on in Washington that you should know about. Plan advisors, such as Minich MacGregor, have been hearing about it, reading about it and studying it for more than a year now. If you ask advisors which side of the battle they are on, you might be surprised at how divided a field it is. The battle is over the new fiduciary rule governing the actions of the advisor or broker for your 401k plan.

What has been poorly communicated to employers, in our opinion, is why this issue should be important to you and other plan providers. Here is the basic, albeit slightly oversimplified, reason this is a big deal and why it should be to you:

Best Interest vs. Suitability

A fiduciary is defined on as:

An individual in whom another has placed the utmost trust and confidence to manage and protect property or money. The relationship wherein one person has an obligation to act for another’s benefit. Click for full text.

An advisor acting as a fiduciary is legally obligated to act solely in the best interest of their client. A fundamental part of being a fiduciary is removing as many conflicts of interest as you can, and fully disclosing those that are inherent. In most cases advisors that are compensated on commission, commonly called brokers or reps, do not, cannot or will not sign on as fiduciaries to their clients. The standard that they are legally held to is called suitability. It is a significantly looser standard that only requires them to sell products and services that are suitable for their clients.

An example:

If a client is looking for a mutual fund or ETF in their portfolio that holds large US company stocks, there are literally hundreds of products out there that reasonably fit that description.  A broker could sell the client a fund in the U.S. large-cap category which is a poor performer, with high internal expenses which pays the broker a higher commission than better performing, less expensive choices and still be well within the definition of suitability. An advisor acting in a fiduciary capacity would have to ensure the recommended fund is in the client’s best interest first; how much compensation is in it for the advisor has nothing to do with the fund being good for the client.

 We are not suggesting that all brokers out there are making 401k recommendations solely on how much is in it for them. However, given that it is the way they often get compensated, the amount of commission a fund will pay them naturally has to be part of their equation. They are not doing it for free and neither is an advisor working as a fiduciary.  The difference is the fiduciary advisor typically gets paid on a fee basis that is revenue neutral; or to put it another way, the compensation they receive is not affected by the selection of one product, brand or solution over another. This removes the issue of compensation as a potential conflict of interest.

How is Washington on my side?

The new rule will ensure all 401k plan advisors, including brokers, are held to a fiduciary standard with respect to the plans they work with. Clearly this would upset the apple cart for huge numbers of brokers out there, many of whom will not be able to make that commitment because of the parent company or broker-dealer they work for. The DOL has essentially maintained, under intense lobbying pressure, that having 401k plan advisors acting solely in the best interest of their 401k clients is going to be non-negotiable. In short, we believe there are some substantial changes on the horizon for advisors and brokers who are working under the current “suitability” guidelines.

For those of us who are already working in a fiduciary capacity to the employers and participants we work with, this all seems a bit self-evident.  It serves as reinforcement to what we have believed all along – acting in our clients’ best interest and putting their needs before our own is in everyone’s best interest.


Is your 401k investment lineup less than stellar? Why?

Is your 401k investment lineup less than stellar? Why?

Many of the plan sponsors we work with want the “best” 401k for themselves and their employees, while keeping the fees reasonable.  “Best” is an interesting concept – best in what? Often our conversation begins centered around the 401k fund choices in the plan.  Commonly it’s a sore spot for sponsors as they can see a marked difference between the performance of the investments in their 401k accounts when compared funds they may have outside the plan.


We preface the entire conversation on 401k investment lineup performance with two truths:  (1) it is impossible to have the best performing funds at all times in any portfolio; (2) the importance of individual fund performance on portfolio value falls behind both the overall health of the various financial markets and the mix of asset classes owned in the portfolio at any given time.


With all that said, there really is no good reason to have significantly sub-standard investment choices with regard to expense ratios or performance in your 401k plan.  Money’s Dan Kadlec recently published an article titled “The hidden reason your 401(k) fund choices are so bad”. The article touches on some important points including the inherent conflicts of interest that exist when the 401k trustee is the one setting the investment menu and managing the funds. He also talks about the employer’s fiduciary responsibility to ensure those conflicts are mitigated.


Quoted in Dan’s article is a brief published by the Center for Retirement Research at Boston College titled “Are 401(k) Investment Menus Set Solely for Plan Participants?”.  One of the key findings of the research pertains to mutual fund companies that act as trustees.  It states that “The analysis suggests that these trustees tend to favor their own funds, especially their poor-quality funds.”


As fiduciary advisors for 401k plans, we are responsible for providing the investment choices to the plan sponsor, effectively eliminating that conflict of interest. Our job is to ensure the plan’s fund choices in each category are good performers with low internal costs, and to keep those choices updated on an ongoing basis.


It is important to note that plan sponsors can never fully eliminate their fiduciary responsibility; however, ERISA’s prudent expert rule allows employers to delegate portions of that responsibility to a qualified advisor. Even under the prudent expert rule however, it is the employer’s responsibility to choose an advisor who can and will act in the best interest of the participants.


Here is a link to Dan Kadlec’s article on yahoo.


Here is a link to the research paper titled “Are 401(k) Investment Menus Set Solely for Plan Participants?” at the Center for Retirement Research at Boston College.


For a definition of the ERISA prudent expert rule on Investopedia click here.

Auto Enrollment for 401k participants is good – paired with Auto Escalation it’s even better.

Auto Enrollment for 401k participants is good – paired with Auto Escalation it’s even better.

Over the past few years, we have seen a marked increase in the adoption of “auto” features in 401k plans such as auto-enrollment and auto-escalation. The concept is simple: 401k plan participation has historically been an opt-in benefit, however, we are now seeing a trend where it is becoming an opt-out benefit. There is no intent to force anything on the participant. Employees still have a choice as to whether or not they participate and what percentage to contribute to the plan.

Why is this so important?

We regularly meet with clients and prospective clients that would be more prepared for retirement, giving them more choices and a significantly higher portfolio balance had they had just started saving a little earlier or saved a little more. Did they have the means to do it? Most times the answer is yes, they either kept “meaning” to do it or didn’t realize the long term consequences of putting it off.

Statistaclly, Fidelity, one of the nations largest 401k platforms, reported in 2014 that the average balance for participants over 55 years old is only $143,300. AARP reported in 2015 that the average 60-64 year old had a balance of $234,000 – that is a 60-85% shortfall for retirement readiness by their calculations.

How does it work?

It is really not much different than what you may be used to now. Once employees meet the eligibility requirements to become participants in the plan, they are given the plan information and a form. The difference is that the form is an opt-out form as opposed to the opt-in form that employers have used in the past. Unless the employee returns the opt-out form, they will be enrolled as a participant in the plan at a base deferral percentage, often between 1% and 5%.

If auto-escalation is a feature of the plan, once per year the participants’ deferral percentage will be increased by 1%. There is typically a cap on the deferral percentage that auto escalation will increase to; often it is the maximum employer matching percentage. Of course, at any time, employees can opt out of the auto- escalation if they choose.

It’s good for the employees, but won’t they complain?

A worry we hear from plan sponsors when they are considering adding the auto features is that employees will complain or somehow feel imposed on. However, the reality is, for the vast majority of participants it is a non-issue. Moreover, participants who have been meaning to increase their percentage or those that meant to enroll and just have not made the time to fill out the current opt-in paperwork are grateful that it is taken care of for them. We have heard stories of large companies that were making the upgrade to auto features building entire call centers to handle the influx of employee questions and complaints, only to find that the calls simply never came in.

The Wall Street Journal’s Blog published a good article on the spread of auto features in retirement plans; it is worth a read and linked below. If you would like to learn more about how auto features might help your employees, we would be happy to have a conversation about our experiences and see if there may be a fit for your plan. Click here to start that conversation.

Reference WSJ blog:

Your employees want 401k help that you and your broker can’t give.

Your employees want 401k help that you and your broker can’t give.

As fiduciary advisors, we talk to hundreds of 401k participants each year both individually and in group education meetings at their workplace. What we have found is that 401k participants tend to fall into one of three categories when it comes to knowing how to choose and manage the investments in their 401k accounts.

First, there are the true do-it-yourselfers; they have a process and execute it according to plan. They are often students of the market on some level and have outside assets they self manage as well.

The second category lands on the other end of the spectrum. They are the participants that do not have the time, inclination and/or knowledge to self manage their 401k portfolios.

The third category falls somewhere in the middle. They are willing to pay attention, but don’t feel they always have enough knowledge to make informed choices.

The problem facing the majority of participants, who fall into the later two categories, is the lack of available help and guidance. As a result, many participants become complacent or inactive while others just start guessing. This really is not their fault. They have been conditioned by the systems in place to feel as if they are on their own when it comes to the investing part.

Asking for help

Let’s look at what happens traditionally when employees want 401k help. If they go to their employer or human resources department, they quickly learn they can only get generic information about the plan and that there is no investment related help, let alone actual investment advice the employer can give. The employer and/or the HR staff are not investment advisors; therefore they do not have the expertise to provide answers to the investment related questions that are being asked. Moreover, advice they give could make the employer liable for the performance (or lack thereof) in the employees’ portfolios.

As a result, participants are instructed by HR to contact the broker on the plan. Since the broker sold the plan including the investments in it, he/she should be able to help. Isn’t that what the broker is being paid for?

Alas, the reality is a majority of brokers are not acting in a fiduciary capacity and are actually precluded from giving specific investment advice to a participant. Instead of actually getting questions answered, a participant is given general investment information. This may include being directed to colorful charts and graphs and perhaps a risk tolerance quiz that the participants complete on their own. The participants are then expected to come to their own conclusions. As a result, often the participants are no closer to understanding what to do than when they first walked in to HR. They may actually be more confused. This is where the guessing and inaction come in.

Why doesn’t the broker actually give advice?

You might wonder why the broker cannot help. On the surface it seems a bit backwards. After all – the brokers are the investment people.

One underlying reason has to do with the way the broker may be compensated. Each choice in the 401k investment lineup has it’s own cost of ownership, commonly called the expense ratio. The broker’s compensation is often based on a percentage of those charges. Since all of the investment choices do not charge the same amount, the broker has a potential conflict of interest. The Department of Labor and the ERISA laws that govern 401k and many 403b plans say it would be possible for a broker to steer participants into the investments in the plan that pay them more than the others so they are precluded from giving specific advice to participants.

A solvable problem

The solutions fall into two categories: One, work with a fiduciary advisor who offers participant advice rather than a sales broker. A fiduciary advisor is compensated with a flat fee, which is not tied to the expense ratio of the investments in the plan, thus eliminating the conflict of interest issue. Or two, add an advisory service on to your existing plan with a third party fiduciary advisor.

As a plan sponsor, it is worth looking at both scenarios as they both have pros and cons. With a little information you can make an informed decision that will benefit your employees and be good for your plan while reducing your fiduciary liability.

To learn more about working with a fiduciary advisor on your 401k or 403b plan, contact us by clicking here.



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