Archive for the ‘Retirement Plans’ Category

Recently Wal-Mart has been in the news.  No not because of the holiday sales or how sales were on Black Friday.  Wal-Mart employee Jeremy Braden has taken his company to court over excess fees associated with their 401(k) retirement plan.  A lower court ruling was recently overturned on appeal.  The appellate panel, citing a 6^th Circuit opinion that said information is material if there is a substantial likelihood that nondisclosure “would mislead a reasonable employee in the process of making an adequately informed decision regarding benefits to which she might be entitled.”  The information referred to is the disclosure of revenue sharing arrangements and other information related to the 401(k) under the Employee Retirement Income Security Act (ERISA). 

In Braden’s complaint, he estimated that fees cost the plan $60 million over the past six years and will continue costing approximately $20 million per year in excess fees.  Braden complaint says seven of the plan’s ten funds charge 12b-1 fees from which participants derive no benefit. 

We couldn’t agree more.  Not surprisingly Bank of America Merrill Lynch is the trustee for the plan.

The complaint also alleges that despite the very large pool of assets, the ten funds available offers only retail class shares, which charge significantly higher fees than institutional shares for the same return on investments. 

Again, we agree with Braden. 

Another point Brandon made was that no changes to the plan investments were made despite the fact that most of them underperformed the market indexes they were designed to track. 

At this point, Braden should be protected under Whistle Blower laws.  Wal-Mart has a history of terminating troubling employees. 

It appears to us that both Wal-Mart and Merrill Lynch do not understand their fiduciary duties.  There is no reason why a plan of this size in not in institutional shares.  We would also question the need for 12b-1 fees.  The amount of estimated fees collected by Merrill Lynch is astonishing.  In previous reports, Wal-Mart required Merrill Lynch not to disclose its fees.  Unfortunately, at this point, ERISA and the Department of Labor still do not require full disclosure. 

Lastly, a simple review of the investment selection on a regular basis would suggest a change in investment line-up.  Apparently, neither Wal-Mart nor Merrill Lynch thought this was necessary.  Mr. Braden has really hit the ball out of the park.  He has nailed this 401(k) retirement plan as being a revenue generator for Merrill Lynch.  Like most bundled plans, the employees are captive to the plan and to poor fiduciaries decisions. 

When we work review 401(k) retirement plans, the fiduciary responsibility comes first.  Apparently, Wal-Mart and Merrill Lynch do not see it that way. 

It is important to recognize with businesses of any size and retirement plans of any size that the plan sponsor act as a fiduciary at all times when making decisions on their retirement plan.  Regular review of the plans investment selection, fees, performance and service are vital to the responsibility held by the fiduciary.

We started looking at asset allocation or target date mutual funds several years ago.  Found mostly in 529 education and 401(k) retirement plans, these funds tend to be used most by individuals that self-manage their assets. 

Target date mutual funds are designed with a glide path that adjust the equities, fixed income and cash portfolios of the funds over a period of time.  The adjustment occurs by moving more of the equity assets toward the fixed income allocation as time expires, and a fund approaches its designated end date. 

The Department of Labor determined that for 401(k) retirement plans, target date funds would be a better default investment than a stable value fund.  The decision was made just before the recession hit, causing many individuals to lose valuable assets in a fund they do not understand.  Target date funds have been included in the investment selection of retirement plans for several years, however this is the first time they are being considered as the default investment.

Likewise with many 529 education plans, many investors find it easier to place the assets in a self-contained allocation.  As a child moves up through grade school and high school, the assets are moved toward fixed income and cash.  Unfortunately the recession has devoured most of the gains, and many will fall short of their savings for education goals. 

There are almost 200 funds that have a target retirement date of 2020.  This list  includes all mutual fund companies with multiple share classes.  The number of funds are similar for each  target date fund from 2020 through 2050.  This adds to the confusion of what is suggested to be a basic investment for uninformed savers.  A target date of 2020 would suggest that you are planning to retire at age 65.  Thus, based on your current age, you would select the appropriate date fund.  For example if you are 40 years old, you may select the 2035 fund. 

If you are thinking about using target date mutual funds, there are three main points to consider:

1. Consider your other assets
2. Consider the costs
3. Consider the risk, glide path and allocation

Many investors are using these funds as the default for their investments.  These funds may be best for savers with little or few assets, because the funds provide them with a saving process to help achieve their goals — be it education or retirement savings. 

If an individual has other assets, though, these funds may only negate the allocation of their other assets – and possibly put their overall asset allocation in an unbalanced position.  You must examine all of your assets when considering using these types of mutual funds. 

These age-based funds are typically made up of the same mutual fund companies as other mutual funds.  So, for example, the T Rowe Price 2040 Fund is made of other T Rowe Price mutual funds in a percentage that will achieve an asset allocation that will assume retirement in the year 2040.  Keep in mind, however, that this adds a management fee on top of the management fee of the associated investments. 

While these so-called fund of funds simplify investing for some, they also cost more for those who may need it the most.  Add to this the commissions and sales charges, and these investments can quickly turn into a costly venture. 

Much of the alleged simplicity can be obtained by investing in separate funds with the proper allocation – and with similar adjustments as you need them. This provides you with more control over the costs and the investment allocations. 

This brings us to the glide path, which is the fund manager’s way of adjusting the investments as time expires and the final date of the fund is achieved.  The investments are moved from equities to fixed income over a period of time.  Fixed income is considered safer at a time when there is the anticipation of drawing down on the investment for its intended use, be it education or retirement. 

Each manager of the varied mutual fund companies determines their own glide path.  We compared the target date funds of 2020 for several fund companies, and found a wide variation in asset allocation not only in the same period but nearly a year later. 

Chart 1: Data as of June 30, 2008, according to company web sites. 

Chart 2: Data as of March 31, 2009, according to company web sites.

Our research considered several of the companies providing these funds.  The charts above show the asset allocations between equity, bonds, cash and other.  These charts really point out the differences in the managers’ intent to provide the largest gain by taking a bigger risk. 

In chart 1, we can see that Alliance Bernstein holds 80 percent in equities while Barclays holds only 62.2 percent.  These strategies will provide very different year-end results and possibly over time in the long run. Investors really need to consider their risk tolerance when choosing which fund is better for them. Unfortunately, these allocations are rarely considered by investors when they place assets in these funds.  Risk and reward should be a part of any decision-making process when selecting which mutual fund company to place your assets in. 

When we compare Chart 1 with Chart 2, we can see that the equity portions of the allocations with Vanguard have increased 6 percent, and yet for Barclay’s it dropped nearly 5 percent. Once again we can see that a manager’s style varies greatly with target date funds. To determine who is correct we would need a crystal ball. 

Target date funds were created to provide investors with a one-size fits all approach to investing. Place your assets in a particular fund, the thinking goes, and the managers will provide an allocation for you. 

We have provided three key reasons as to why they do not work for everyone. But also consider this: When picking a fund, it is just as important to consider the funds in which the target date fund invests. Investors almost need to evaluate the entire mutual fund company because they need to understand the costs and risks of all the managers associated with the investment. 

These are not a one size fits all investment. 

Dennis K. O’Brien Offers Some Advice to Plan Sponsors of Retirement Programs such as 401ks as They Navigate Today’s Volatile Markets.