Posts Tagged ‘401K’

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.

Well today it was announced that Social Security will not provide any increases for the next two years.  This coupled with increases in Medicare means that seniors will have to dig deeper for savings to met their bills while for others, they will look for ways to decrease monthly bills.  We always have promoted saving while your younger.  Our retirement plans such as 401(k) and 403(b) that we provide have the best investments and lowest costs.  In that regards, we were contacted by the Star Ledger to comment on the needs of those on Social Security and how to address the frozen increases. 

The link to the Star Ledger page is:

http://www.nj.com/business/index.ssf/2009/08/surviving_shrinking_social_sec.html

This article by Leslie Kwoh provides suggestions on cutting back your bills.

Dennis O’Brien discusses the risk of investing in target-date funds in a story examining the hearings being conducted by the Securities and Exchange Commission and the Department of Labor on these investment vehicles.

 What’s Up With Target-Date Funds?

By PAUL KATZEFF, INVESTOR’S BUSINESS DAILY

Posted 06/23/2009 05:10 PM ET

 The latest financial scapegoat? Target-date funds. At a joint hearing by the Securities and Exchange Commission and Department of Labor last week, critics beat up on the increasingly popular mutual funds.

 The catalyst was that most target-date funds — like much of the fund industry — lost ground last year.  The problem was that some people were shocked by that.

 “Some people think these funds are risk-free,” said Dennis O’Brien, president of Coastal Financial Advisers, of Farmingdale, N.J. “They don’t understand that these are investments. They can lose ground, especially during short periods.”

 In the worst-case scenario, the SEC and DOL could restrict how target-date funds invest. The DOL will take public comments until July 18. After that it will indicate what action, if any, it plans.

 “There is no denying that 2008 was the second-worst market ever for equities,” Francis Kinniry, a principal in Vanguard’s Investment Strategy Group, told IBD before the hearings. “Everyone should take a deep break and use a much longer lens than one year. The market has rebounded (about 34% off its March 6 intraday) low. That should influence the eventual outcome here.”

 A bigger problem for target-date funds is how fund families market them, said O’Brien, who is a financial adviser to individual clients and consultant who helps corporate clients set up and run 401(k) plans.

 “Not enough fund groups clearly explain how these funds are run and how they differ from each other,” O’Brien said. “Not enough of them explain their risks or their costs.”

 The stakes are rising. Target-date funds have grown a lot. As of May 31 they held $181.8 billion in assets. That was 3.06% of all fund assets and up from $152.8 billion on Dec. 31. It was also well up from $7.2 billion at the end of 1999, or 0.16% percent of all fund assets.

 The funds have become a staple of 401(k) plans, especially since 2007. Late that year the DOL gave incentives to plans that use them as default investment options for workers who are automatically enrolled.

 Proliferating Portfolios

Target date funds are in more than 33% of all 401(k) plans, says the Profit Sharing/401(k) Council of America. That’s up from 25% in 2005.  The funds generally invest in other mutual funds. A parent fund’s ratio of bonds and cash to stock typically grows as the target date nears.  That’s meant to better preserve the fund’s principal. The target date is usually near a shareholder’s intended retirement. Target-date funds overall averaged a 32.96% loss in 2008, according to Morningstar. The S&P 500 lost 37%. U.S. diversified stock funds averaged a nearly 39% loss.

 As might be expected, target-date funds with the longest investment horizons generally did worse. Last year funds with a target date of 2050 or later averaged a 39% loss. The $10 million JPMorgan SmartRetirement 2050 fell 33.53%, marking the best of the long-range funds.

 Funds with target dates from 2000 through 2010 fared best, averaging a setback of 22.46%.

 Among funds with the shortest views, $32 million DWS Target 2010 took top performance honors with a 3.61% loss. The $20 million Oppenheimer Transition 2010 was the cellar dweller with a 41.84% plunge.

 Too many shareholders do not understand how target-date funds differ, O’Brien says. First, there are two broad varieties.

 In addition to the type known as target-date funds, there are lifecycle funds. These portfolios do not shift their asset mix over time.  Instead, as he ages a shareholder is supposed to hop from one with an aggressive investment strategy — usually with more stocks — to one with a moderate strategy. As he nears retirement, he shifts to one with a conservative tack, with more bonds and cash.

 Different Approach

Second, many shareholders do not realize that funds with the same target date or in the same lifecycle category often invest differently.

 They can have different ratios of stocks, bonds and cash. Drilling down, they can also have different types of stocks and bonds.

 “A fund with all blue chips tends to perform differently from one with a mix of large caps, small caps and emerging markets,” O’Brien said.

 Also, only some funds stop making strategic moves when they reach their target date. Some shareholders cash out. Others want ongoing growth or income.

 “Some fund families do a better job than others of explaining things,” O’Brien said. “Shareholders can look up information at fund Web sites. They can also check through their 401(k) plans.”

 © 2009 Investor’s Business Daily, Inc. All rights reserved. Investor’s Business Daily, IBD and CAN SLIM and their corresponding logos are registered trademarks of Data Analysis Inc.

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.

Dennis K. O’Brien was selected as a speaker at the Trenton Small Business Week event for the Retirement Plan Session.  The seminar will discuss 401(k) fee, service and fiduciary responsibility.  The event draws on business leaders from several New Jersey counties to improve their businesses.