The Diversified Blog

A wealth management blog dedicated to creating a long lasting sustainable retirement.

401(k) Plan Roundup

401(k) plans have received a lot of press and attention of late. Recent implementation of Department of Labor regulations has resulted in some changes for 401(k) plan participants and plan sponsors.

Here are some recent articles that offer some critiques and issues facing 401(k) plans today.

"Bad behavior persists in 401(k) accounts"
In an April 2013 article, author Linda Stern highlights how many 401(k) participants have missed much of the market rebound since 2009 due to their own ‘emotionally driven’ behavior. The article mentions one positive trend in 401(k) plans since 2009 – the elimination of large stakes in company stock within 401(k) plans. A 401(k) plan can be your largest financial asset and it is crucial that you are receiving the information and advice you need when it comes to your 401(k).
Full article:

“Ban ‘active’ fund from 401(k)s, IRAs”
In March 2013, Alicia Munnel of the Center for Retirement Research at Boston College wrote a short article highlighting her position for why ‘Investments in tax-favored accounts should be limited to index funds’. She found that there is not a correlation between the high fees of actively managed funds and higher investment returns. Her position goes so far as to suggest ‘banning actively managed funds from tax favored plans’.
Full article:

“Cover: Delegation of Duty”
This article delves into the selection and monitoring of a 3(21) or 3(38) fiduciary assigned to a company 401(k) plan. Plan sponsors need to do their homework when outsourcing this important role and have a prudent process in place to select and monitor the plan fiduciary. Recent laws have changed where the responsibility falls and it’s not as easy as signing away the role.
Full article:

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New 401(k) disclosure laws are in effect-How do you interpret them?

Legislation that took effect last summer was a huge step towards clarifying and enlightening plan sponsors and participants as to the fees they are paying for their 401(k) plans. Each plan must provide plan sponsors and their fiduciaries a 408(b)2 document, also known as a fee disclosure report. Many studies have revealed that the majority of plan participants feel that they are not paying any fees to participate in their 401(k) plan. Plan participants must now receive a 404(a)5 fee-disclosure and that is usually incorporated into their quarterly statements.  Unfortunately, most plan sponsors and participants do not know what to do once they receive these fee disclosures and are often overwhelmed by all of the jargon that is used in the disclosure documents.  There are several steps to take to ensure that the fees for the 401(k) plan are fair and reasonable for the size of the plan.

The first course of action should be hiring an outside professional/consultant to review the fee disclosures.  Fee disclosures are complex and complicated, making it difficult to understand the information provided. Typically, a professional with a CFP®, a background in finance, or specific training regarding 401(k) plan consulting will be able to decipher and interpret the disclosures.

Another good practice to better analyze a company’s 401(k) plan is to benchmark the plan. The plan sponsor must determine if the fees are reasonable for the services provided to the plan. Benchmarking the plan will compare the company’s 401(k) plan to plans of similar size in terms of total overall assets in the plan. With benchmarking, side by side comparisons show how the company’s plan measures up, while fee disclosure documents simply report on the plan’s fees, with no comparison to other plans.

A good 401(k) benchmark report should include the following:

  • Plan Fees Summary: Comparison of the plan’s fees to the appropriate benchmark group.
  • Service Provider’s Fee Disclosure: Summarizes the fees which are paid to the primary service providers.
  • Investment Lineup Summary: Summarizes the investment expenses of the plan choices compared to the benchmark group.
  • Relative Plan Complexity: Compares an estimate of the plan’s complexity relative to other similar size plans.
  • Participant Success Measure: depicts how well the participants are utilizing the plan to prepare themselves for retirement.
  • Advisor/Consultant Services: Highlights the key services the advisor/consultant is providing to the plan and it’s participants.

The Appendix of the benchmarking report should include:

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New 401(k) fee and reporting disclosures have taken effect

Entrepreneurs of Boulder County there are new disclosure rules for retirement plans that make your job tougher. The new rules are in response to lawsuits filed by employees and excessive fees charged by retirement plan service providers, the Department of Labor (DOL) issued new disclosure rules and regulations for 401(k)’s, pension and profit-sharing plans and many 403(b) plans. Many plan participants have seen shrinkage in their retirement plan values, in part due to market volatility and in part due to excessive fees charged by service providers. Over time, excessive fees can have a substantial negative compounding impact on investment results. The resulting regulations to correct these issues, are a three part fee-disclosure regulation set by the DOL.

The first part of the regulations essentially took place in 2009 and primarily focused on government reports, using Schedule C of each retirement plan’s Form 5500 annual report.

The second part of these regulations, effective July 1, 2012, is known as the 408(b)2 regulations and pertains to the service provider fee disclosures. The new regulations apply to all new and existing service provider arrangements, and require the service providers to disclose all compensation, fees, and a detailed description of all services to the plan. The disclosures must also reveal revenue sharing agreements to the provider’s affiliates or subcontractors. This information must be disclosed to the plan fiduciary and the plan sponsor. Plan fiduciaries have always had the obligation to monitor plan expenses under ERISA but now the ultimate oversight and well-being of the plans falls to the plan’s designated fiduciary.

The third part of the DOL’s regulations, known as 404(a)5, took effect on August 31, 2012. The amendments require plan fiduciaries to disclose fee information to plan participants. Most participants will get their first look at the new fee disclosure regulations when they get their third quarter 2012 401(k) statements. The goal of this regulation is greater transparency and standardization in the way fees and expenses are disclosed and reported to plan participants.   

The Advisors AccessTM 408(b)2 bulletin has laid out an action plan for fiduciaries and retirement plan sponsors which is summarized below:

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