Posts Tagged ‘Retirement Plans’

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.

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.

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.