http://www.pbs.org/wgbh/pages/frontline/business-economy-fin...Last night Frontline had a program on Retirement Planning on PBS. The focus is watch out for big expenses being paid on your 401k investments. They also suggested asking your adviser if they are a fiduciary--to avoid those who mostly sell investments and claim to be advisers. They also strongly recommended index funds for better performance at lower cost.I don't think anyone on Motley Fool will find that information new, but if you need a refresher on the subject, take a look at the program. It is now available at the above link.
and be mindful of the fact that the focus was on the impact of fees - but not on the value of the services provided, or the tax benefits of participation, or on the ease of payroll deducted savings, or on the anti-alienation benefits of investing in a qualified retirement plan, or on....
I think we also know that many large companies have plans with major custodians like Fidelity and Vanguard. They offer decent investment choices, good service, and low fees.But small employers plans often do not qualify for the low cost custodians. They still want a 401k plan to be competitive in attracting quality talent. But their choices are limited. Often they have expensive plans with high fees and sometimes poor performance.It is worthwhile looking at the fees for your plan and asking why your investments are not performing. As often as not people invest too conservatively (in fix income accounts for fear of losses).
I think we also know that many large companies have plans with major custodians like Fidelity and Vanguard.You mean "Fidelity" that got stung in the Tussey case for excessive fees, and is currently being sued BY ITS OWN EMPLOYEES for excessive fees in ITS OWN PLAN?I've worked in the large, mid, and small plan markets, and the hysteria is mostly just that. Are their abuses? Oh yes. But there are many more non-abusive scenarios than there are abusive ones - but you only hear about those where someone perceives an abuse.Keep in mind a few things. First, the "cost of the investments" is DIFFERENT than the costs of administration. Vanguard has some low low low priced index funds, and other investment options - but what they charge for administration isn't cheap - and a lot of necessary or nice to have services are at added cost (it's an ala carte approach). Others "all in" can be competitive - keeping in mind that there are costs associated with trusts, non-discrimination testing, education, call centers, transaction (and secure) websites, disclosure and reporting, and the like. Sometimes "revenue sharing" will offset some of those costs - but Vanguard funds pay no revenue sharing, so usually hard dollar costs have to be added.Second, there is a "minimum charge" for a plan, just because of all of the things just mentioned. Where I currently work, the model (small plan) is that for every 75 plans brought in, we need one new person for admin work on it. Does not matter how big or small, when we hit 75, we need to hire. Spread that cost over 75 small plans, and it makes it seem more expensive than it does if spread out over large plans. BUT, that's the base price for running a plan - and this isn't a charity.Third, when you invest through a plan, not only do you get the safety of fiduciary oversight, but you also in many cases get institutionally priced funds. Some funds will cut expenses if the amount invested in high enough. Some require $5 million (in the entire family of funds), some as low as $1 million, and some have lower priced share classes JUST FOR RETIREMENT PLANS. I can't buy institutionally priced funds through my personal brokerage account - or even directly through a fund company. But through my plan, I get them.Yes, we can all talk about abuses, or lousy investments (and don't even start with the "passive vs. active" argument - as that is really a matter of opinion) - but the reality is that MOST plans are efficiently run, pay reasonable fees (and those fees have been going down for the last decade or two), and return a significant bang for the buck. Can they be made more efficient? Yes, but the regulatory overhead is part of the concern there - and that exists for a reason (I actually was practicing law when some companies set up 401(k) plans - where you defer up to $45,000 annually, and the top dogs did NOT tell the employees it existed - so they got all of the benefits for themselve. Now, we have rules to prevent that, and make the plans available across the board - with limits on what the top end can do based on what the bottom does - incentivising the top dogs to encourage participation). So, the regulatory overhead is there because abuuses occurred. Now, there is a cost for that.So people should actually do some homework before they condemn - and the reporters on Frontline didn't do that. They looked at a few abuses without looking at the industry as a whole.
Still the people who work for small employers too often find themselves in plans offered by full service brokerage companies or insurance companies. They can be paying loads of as much as 5%. They can be trapped in plans with surrender charges if they try to move their funds.As often as not on this board we hear from people who have complained (usually by polite letter) about the costs or investment choices offered in their small employer plan. As often as not, employee is asked to suggest a better custodian. And then the question comes here for suggestions.The best low cost plan I am aware of is Principal Financial, and I doubt it is inexpensive. I was not aware that small plans from Vanguard or Fidelity are available. Usually people report here they are not interested in small plans.If you are aware of low cost plans for small employers, please post them. That is a frequent question on this board.We also hear that many companies are able to fund the costs of their 401k plans from matching funds that employees abandoned by leaving prior to vesting.
My point was, and is, we only hear from those who complain. Those who are satisfied never speak up. I deal with 1228 small DC plans (and about 350 DB plans) and went through the whole fee disclosure process last year for each of the DC plans - and I can assure you, we got no complaints - from either the plan sponsor or the advisors representing them.There are a lot of bundled and unbundled solutions for smaller plans (and I've never heard of a 5% fee - EVER). Hancock, Mass Mutual/Hartford, Principal, Great West, American Funds, ING and others all have suitable products. Some with more bells and whistles, some with less. Most with reasonably open architecture for investment selection (and none with a requirement to use soley "proprietary investment products").Fidelity through what used to be called the "Fidelity Advisor" line would cater to smaller businesses - and that has now been merged into the regular Fidelity offering. Not sure if there is a minimum - but it's fully bundled, and usually more expensive than an unbundled alternative. Vanguard doesn't provide record keeping service below a threshold - but Vanguard funds are widely available on other platforms through other providers - both bundled and unbundled.The key to the whole thing is that teh plan sponsor/employer needs to do their homework and shop around for what they need - and not just sign up with teh first saleperson that comes around (or the brother-in-law or nephew or, in one case I saw, his daughter (strictly prohibited!)).We do business with 78 different record keepers/fund companies - and the prices, features and services vary widely.
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