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Thursday, June 04, 2015

A 401k Plan the Supreme Court Would Love

As we described in our previous post, the vast majority of 401k plans do exactly what the recent Supreme Court decision in Tibble V Edison Avoid_401k_Lawsuitsindicates you shouldn't do—condone higher-cost share classes on your actively-managed funds.  While you've likely been led there covertly by commissioned sales people (advisors), this case declares that you need to understand the concept and know the cost factors, because it's your problem, not theirs.

The entrenched providers, at best, will acknowledge that most plans “could use a little tweaking”.  But the reality is much harsher than that.  Most plans don’t just need a little tweaking.  They need a complete overhaul. 

The good news is that an overhaul is surprisingly easy to do and you can do more than just defend against high cost-related lawsuits when you do it.  There are several common compliance challenges in most plans as well.  And, if we can set aside the negative motivation (fear of legal action) for just a second, what if you really wanted your plan to be successful and you really sought to be a champion fiduciary?  Would everyone be in your plan?  Would they all be earning your match?  Would they be invested in low-cost funds that help them maximize their retirement savings?  Would they invest too conservatively and suffer negative returns after expenses and inflation?  Would they invest too aggressively for their own risk tolerance and then run when the market goes down?

With one overhaul; all these challenges can be addressed.  The focus needs to shift from defending your plan in court to actually helping every employee succeed at maximizing his retirement savings—removing any legitimate reason to even complain!

What does this plan look like?  One comprised of pre-built portfolios made up entirely of low-cost index funds and that reflect each participants’ risk tolerance and years to retirement.   The sponsor of such a plan will have made a very prudent decision to invest in low-cost funds to maximize his participants’ savings.  He will have structured the investments in such a way that choosing the appropriate portfolio was simple for participants.  Lastly, the sponsor has an easy story to tell participants—pick your portfolio and stay the course—investment education replaced with savings education. 

Now THAT’S a plan the SCOTUS would love! 


Ready to overhaul your plan?  Click the button below to get started!


Posted by Sarah Harris at 1:37 PM
Tuesday, June 02, 2015

What the Supreme Court’s Ruling on 401k Plans Means for You

The Supreme Court just heard a participant-brought lawsuit, Tibble v. Edison, against a company over its 401k_Lawsuits_on_the_Rise401k plan and high-cost investments.  At issue was whether or not the plan sponsor had an on-going duty to ensure prudent investment choices in its 401k lineup.  The court found, in a rare unanimous decision, that they did. 

The focus of the case was quite narrow actually:  Was it OK for a plan sponsor, with a legal obligation to look out for its plan participants (thus, a fiduciary), to condone an actively-managed mutual fund in a high-cost share class when lower-cost share classes were available?  The answer was no.   The Court also addressed the "statute of limitations" for prudent investment decision-making in a plan, but to us that is by far the less impactful part of the decision.

Here's the big deal for plan sponsors.  The vast majority of plans do exactly what this decision indicates you shouldn't do—condone higher-cost share classes on your actively-managed funds.  While you've likely been led there covertly by commissioned sales people (advisors), this case declares that you need to understand the concept and know the cost factors, because it's your problem, not theirs.

While higher-cost share classes are present in most plans, the better and much bigger question is why there are still any actively-managed funds in your 401k.   If the goal is lower cost and more effective investments for participants (which the Court has ruled it is), then the evidence says that all plans should use index funds with better, more persistent returns at about 1/5 the cost of actively-managed funds.

 A cursory review of the body of participant-brought lawsuits shows that complaints about high cost are present in all of them.  Most of them are NOT focused on the narrow issue of share classes—but the presence (or lack thereof) of index funds and lower overall cost.  If this case had been about these broader issues—and it's just by chance that it wasn't—the Court's opinion would effectively render actively-managed funds obsolete!  That day is rapidly approaching—and it's good news for participants and for every plan sponsor that takes action to fix his plan before he's sued or otherwise compelled to do it.  High-cost share classes cost participants additional money but otherwise deliver the same return as the lower cost version (s).  Actively-managed funds cost participants far more than index funds and underperform them 80% of the time!  Do we really need a court to help us see this is the better course?

Stay tuned for our next blog: A 401k Plan the Supreme Court Would Love!

Click below for some light reading in the meantime.


Posted by Sarah Harris at 3:30 PM
Friday, March 20, 2015

Three Steps to a Profoundly Better 401k Plan

It’s hard to fathom why plan sponsors continue to condone actively-managed 3Stepsfunds in their plans.  We’ve heard all the arguments, but they all fall flat in the face of mounds of research and evidence showing that index funds are infinitely more valuable.  Yes, there’s now an undeniable trend of investors moving away from actively-managed funds and into index funds.  But while we’re giving props to employers who are making this important switch, we’re also fanatics about ensuring the other components of a successful 401k plan are not ignored.  If you take the three steps below, you’ll find yourself with a profoundly better 401k plan.

Step One:  You guessed it….dump your actively-managed funds for low-cost index funds.  Why?  Lower cost and more persistent, higher returns for all your plan participants.  The aforementioned mounds of evidence show that index funds beat their actively-managed counterparts at least 80% of the time. 

Step Two:  Organize your low-cost index funds into pre-built portfolios that reflect employees’ risk tolerance and years to retirement.  Why?  It eliminates most of the need for investment education, which we now know kills participation.  And it eliminates “bad” investor decision-making that's found in virtually every plan.

Step Three: Educate your employees on how to save (not how to invest).  Why?  Because that's the trigger for great participation.  Step two is the key to being able to utilize a savings education strategy.

If you take these steps, you will have a low cost 401k plan that is successful in every sense of the word.  And, if you’ve been keeping up with all the participant-brought 401k lawsuits in the news lately, you might also note that you have completely eliminated every major complaint in every participant-brought suit!

Need some help getting this done?  We’ve got a complete solution that’s available to you right now.  If you’re ready to move to a fully successful plan NOW, click below to request a proposal.  If you’re just starting to think about step one, click below to get a free cost chart that will highlight how far your plan costs have to fall.



Posted by 401K Revolt at 3:27 PM
Monday, February 23, 2015

The Surefire Way to Avoid Cost-Related 401k Lawsuits AND Have a Successful Plan

If you have actively managed funds in your 401k plan today, it's a safe bet your advisor is not providingAvoid_401k_Lawsuits any real guidance on plan cost.  But even without his help, you can easily Google the topic of actively-managed fund cost and performance vs. index (passively-managed) fund cost and performance.  What you'll find is clear proof that index funds, at a fraction of the cost, outperform active funds 80+% of the time.  Any layman can read and comprehend this research without any "expert" assistance.  Talk about transparency!

As we look at the common factors in nearly all 401k lawsuits, no plan sponsor would have lost his case, or been forced to settle, if his plan contained all, or mostly index funds!   Such a plan would have acted upon the overwhelming evidence mentioned above.  It would have minimized the cost to participants while giving them the greatest odds for making a solid return on their savings.  It would have established the plan sponsor as not only a responsible fiduciary but a champion of his participants as well.  Case dismissed?  Way better than that: the two most prevalent bases for every suit we've reviewed are eliminated entirely!

If you happen to be a plan sponsor who has loftier goals for your plan than avoiding penalties and staying out of court—like having every employee participating, earning the maximum match, savings as much as he can, investing in a way that fits his risk tolerance and gaining as much retirement security as possible, you can take an index fund strategy to a whole new level.  If your company had a 401k plan with pre-built portfolios made up entirely of low-cost index funds, your participants would have no reason to sue you at all.  If you can do that, AND help your participants truly maximize their retirement savings, why would you, as a fiduciary, not pursue that course?  The only reason not to is if you have no interest in a plan that is truly successful for your company and your participants.  In that case, the best course may be to resign your fiduciary role!

What happens when all the elements of a truly successful 401k plan are implemented?  Check out our case study and see for yourself!


Posted by 401K Revolt at 11:11 AM
Thursday, February 05, 2015

401k Lawsuits on the Rise: The Harbinger of Successful 401k Plans?

401k-related lawsuits are everywhere lately, and the number is trending up!  What’s the near omnipresent401k_Lawsuits_on_the_Rise issue in all these suits?  High cost.  Most have been settled out of court to avoid the bad publicity because the stakes are so high.  The Merrill's, Morgan's, Fidelity's and John Hancock's of the world are siphoning  millions and millions of fee dollars from participant accounts—all at risk if the general public should finally learn the truth about the magnitude of these largely hidden costs.  For plan sponsors, the financial hit may be proportionately less; but for them, the complete loss of employee credibility may be an even greater cost. 

The reason ERISA exists is to protect investors from abuse, and it clearly lays out the responsibility of a plan fiduciary.  Many plan sponsors have been led to believe their responsibility can be delegated or transferred to outside entities.  If you take the time to read over the body of cases, you might be surprised to see how quickly and effectively all the so-called co-fiduciaries shirk any responsibility!

 More recent regulations on fee disclosure (408b primarily) take more precise aim on the fees in 401k plans (some hidden, some in plain sight).  Consumer advocates hoped these required disclosures would result in the sudden recognition that plan participants are being over-charged.  No such recognition has occurred.  Not because plan sponsors and participants are oblivious, but because the "providers" continue to obfuscate cost to preserve their own existence.  And their existence is truly at stake, so their effort is understandably obsessive. 

The 401k-plan world is dominated by actively-managed fund families and the commissioned salesmen who sell them.  They defend their service in spite of average participation levels of about 60% and persistently poor (if not disastrous) investment decisions by participants.  They produce "benchmark" studies that compare every over-priced plan to a universe of over-priced plans, and then declare your costs to be reasonable!  So far, it seems to be working well for them.  The movement away from actively managed funds and high add-on fees is barely noticeable.

Amazingly, the very plan aspects being challenged, litigated and settled in favor of participants in these lawsuits are present in virtually every plan we see!  Many plans are much worse—they’re just lucky enough to remain unchallenged.

Stay tuned for our next blog about the surefire way to AVOID cost-related 401k lawsuits!

And in the meantime, check out our "Essential 401k Whitepaper" to get the scoop on why most 401k plans are not successful 401k plans!


Posted by 401K Revolt at 11:44 AM
Thursday, December 11, 2014

4 Ways to Play 401k Plan Santa for Your Employees this Holiday Season


1. Cut the costs. We can pretty much guarantee you that the plan costs you and your participants pay is way too much. Your advisor might tell you that he has reviewed it and it's "in line" with the industry. But he’s playing Scrooge in the Christmas play! He might quote the Department of Labor's contention that "401K costs are trending down." But even if that’s accurate, they have A LOT farther to fall; "reasonableness" shouldn’t be based on the collective failure of the industry. A typical 401K plan, comprised of actively managed funds, costs about 150 basis points on average. It can and should cost closer to 40. So is your cost really “reasonable” at 145?!

2. Dump the Actively-Managed Funds. Index funds outperform actively managed funds 80% of the time. Don't believe it? There are endless studies that prove it. Check out the latest Dalbar Study for a great set of numbers and charts. Why on earth would you subject your employees’ money to higher, non-productive cost? Actively managed funds outperform the index so infrequently (and the rare winners never repeat), the event could only be characterized as a Christmas miracle. Wouldn’t you rather tell employees that your plan helps them succeed by not subjecting them to false premises and excessive cost?

3. Use Pre-Built Portfolios. If you ask most employees how they feel about the choices they’ve made in their 401k plan, and how confident they are that they will have what they need to retire, you will find a lot of people who are lost with no hope. The Holidays and the New Year are the time for hope! But the startlingly simple answer to these woes begins with a plan of all model portfolios. This gets all your participants professional management of a portfolio that matches their goals. The initial education task is then a simple one: how to pick the portfolio that makes sense for me. This is a simple function of a risk questionnaire and years to retirement.

4. Invest in Savings Education. Investment education gives way to savings education—something everyone can understand. This is a gift worth giving!  The themes are simple:
• Everyone should be in the plan
• Start saving early
• At all times of your life, save as much as you can
• Pick a portfolio that fits your risk tolerance and years to retirement
• Stay the course

Whether you’re 20 or 60, these basic goals are just as appropriate. Written materials, presentations and web-based education tools can now be greatly simplified and the vocabulary of investing largely abandoned. The participant is not confronted with investments, buying, selling, re-balancing and investment toolboxes. How could that ever work?! The basic message is “set it and forget it”—until your time horizon changes.

It’s highly likely that you can lower the cost of your plan by 50% or more and make it more successful for both your company and your employees. Do you still have actively-managed funds in your plan? Are you still hoping to turn employees/participants into investment pros? Do you have poor participation? Are your participants failing to save enough?  Are participants exhibiting bad investment behavior with their accumulated savings? Only you know the answers to these questions. But if you answer “yes” to all (or most!) of them, it’s time to shop for a new plan for the New Year!

The questions we pose in this blog are designed to get you thinking about where your plan is today, and where it might fall short of your own definition of success.

Click the button below to read our case study and see what a successful 401k plan can do for your employees!


Posted by 401K Revolt at 3:32 PM
Tuesday, September 16, 2014

Why Most Target Date Funds Are Off-Target

As a basic premise, every 401k plan should enable every participant to maximize retirement savings on his Custom_TDFsor her timetable.  To accomplish this, plan costs should always be kept as low as possible and each participant needs be able to invest in a way that reflects his personal risk tolerance, thereby growing his account at a level of risk that is comfortable for him.  Consistent returns are clearly important as well.

Every plan needs to either provide education that enables the participant to create an appropriate, personal portfolio and then manage that portfolio on an ongoing basis or, provide some "managed" option that does this for the participant.  Given the well-documented failure of investment education and the resultant, miserable participant decision-making and results, the target date fund (TDF) concept has emerged as a solution.  Many plans offer them and they are attracting more assets than ever.

The intention of “off-the shelf” Target Date Funds is good.  They’re professionally constructed and managed, they eliminate much of the need for investment education and the fruitless effort to turn plan participants into competent investors, and they encourage a set-it-and-forget-it mindset.  But they also come with a bag of problems. To name a few:

  1. High cost - either because of actively-managed funds, management fees or both

  2. Nearly always comprised of relatively poor-performing funds

  3. Don't take into account the individual's risk tolerance

  4. Don't get re-balanced frequently enough (usually only yearly)

  5. As a result of #3, it's more likely that participants with a low to moderate risk tolerance will "run" when the market goes down. (TDFs are too aggressive in the early years for these people)

Properly constructed, there should be no cons to a target date fund.  However, customization is key.  A great TDF: 

  1. Can be low cost - via low management fees and use of all index funds

  2. Can provide persistently better returns - index funds outperform actively-managed funds 80+% of the time

  3. Reflects both the individual's risk tolerance and the various time horizons

  4. Is professionally managed

  5. Is re-balanced quarterly

  6. Encourages a set-it-and-forget-it mindset

The most critical aspect of the "target date" concept is that, when offered in a front-and-center manner, (i.e., not as just another investment choice among many), employees are not repelled by the complex, incomprehensible and off-putting jargon of investments, so they join the plan. Not saving (non-participation) is the single biggest problem for employees, and non-participation is the biggest reason that plans fail their non-discrimination tests.  Using target date funds properly can solve these and other problems to make every 401k plan successful for employee and employer alike.

The bottom line is this:  the success of TDFs in your plan (meaning they achieve the basic plan premises cited above) depends entirely on who builds the custom funds and how they are deployed in the plan.



Posted by Eric Kiesshauer at 10:00 AM