When you first started your job and enrolled in the company's 401(k) plan, you were presented with a list of investment options. Ever wonder how these investments got in the plan?
This wasn't the work of financial leprechauns. At some point, someone made these decisions.
If it turns out that your plan's investment choices came from a thoughtful, comprehensive, continuing review of the 401(k) plan market, you work for an unusual company indeed. At most companies – especially small and mid-size ones – the likely answer is that no one knows how the current investments in the plan got there. If this is the case at your company, your plan probably isn't serving your interests.
Chances are that your plan's options – probably mostly or all mutual funds – came pre-packaged from the platform of a large insurance company. There's nothing inherently wrong with this arrangement. But if employers fail to select a quality plan provider and hold their feet to the fire on your behalf, they can easily end up with inferior plans.
Among the typical shortcomings of plans is the offering of too few investment choices. Often, some plan options aren't really options at all because the available funds own many of the same types of stocks. This lack of diversification probably means that many employees are taking too much risk. If large-company stocks take a hit and you own several funds with a large chunk of stocks in this category, this outsized risk exposure can spell doom for your portfolio.
Desirable plans have funds that are varied in size: large cap, mid-cap and small cap. They also have varying degrees of aggressiveness to serve the needs of employees with different risk tolerances.
Many large companies have substantial resources to administer plans so that they can offer a wide variety of options and services. But many smaller employers can't. And typically, these companies lack the resources to provide employees with the education and advice they need to make investment decisions – and often fail to assure the delivery of these services by outside service providers.
You're the one who ultimately makes choices from your 401(k) plan, so you're your own financial planner. For most people, 401(k) plans are the only investments they have besides their homes, so learning to manage these investments is critical.
Since these plans were made possible by an act of Congress in 1974, employers have been legally accountable for making sure that 401(k) plans serve employees' needs. Yet enforcement of these rules has been lax.
Now this is changing. The federal Department of Labor (DOL) is holding employers far more accountable with new regulations that reinforce and expand longstanding rules. Among them are regulations aimed at eliminating unreasonably high plan fees – fees that you're paying out of your account. Also, fees that previously carried no disclosure requirement must now be disclosed in quarterly statements to employees, beginning this fall. You may be shocked at how much you're paying.
The new rules don't just focus on fees. They also force companies to take a hard look at what employees are getting in return. Are there enough investment choices? Are employees receiving plan education and advice on what mix of investments is best, given their age, risk tolerance and goals? Did the plan provider include mutual funds in its platform mainly or solely because the mutual fund companies paid them a kickback? (Though such conflicts of interest remain legal, they must now be disclosed.)
The new DOL rules require employers to evaluate the answers to these questions with the goal of improving plans. The effect of the new rules will be to put plans under a microscope. You can peer into this microscope and, if you make the right moves in reaction to what you see, you may be able to play a role in improving your plan.
First, however, consider increasing your own accountability by:
• Reading your quarterly 401(k) statements. These statements show returns after fees have been removed from your account. Your fall statement will be much different because it will show returns and fees. Find out exactly when your fall statement is due to arrive, and make a note on your calendar to read it carefully when it does.
• Checking Morningstar, the fund-rating company, to see how these funds have been performing compared with others that might have been available. See what types of companies each fund owns.
• Getting a hold of the current plan documents to find out whether you could have originally selected – or later switched to – funds with better performance and greater diversification. If you failed to do this, don't kick yourself – unless you took a long lunch instead of attending an educational session. Companies need input from employees on how to adjust plans to better serve them, so this new regulatory era is an opportunity for you and your employer to improve your plan together.
You can help your company by:
• Offering to serve on your plan's governance committee so you can have an impact on key administrative decisions. To assure employee buy-in, some employers make sure rank-and-file employees serve on this committee along with managers and HR people.
• Asking your employer to evaluate whether the investments in your plan are appropriate. Do they represent enough variety to serve different employees?
• Getting over any embarrassment stemming from your lack of investment knowledge and ask for more or improved educational sessions, provided by an independent adviser who is free of potential conflicts of interest.
By getting involved, you can help your employer comply with the new rules and increase your potential for building a bigger retirement nest egg.
Anthony Kippins is president of Retirement Plan Advisors, Ltd. a Registered Investment Advisory firm that addresses the needs of retirement plans and the employees who invest in them. An Accredited Investment Fiduciary Analyst (AIFA®) with more than 30 years of experience domestically and abroad, Kippins specializes in providing fiduciary advice to retirement plans on governance, investments and educational services. He also advises individual clients on retirement planning and investment management after retirement. Kippins serves as managing director of Institutional Fiduciary Assurance LLC, an organization that provides fiduciary advice to trustees of endowments, foundations, non-profit organizations and charitable trusts. He can be reached at firstname.lastname@example.org.