The following topics are covered in this month’s Research Newsletter from the BeManaged Research Department.
- Late Rally Saves Second Quarter Statements
- Fiduciary and Suitability Standards: Copybook Headings for Investors
401k fiduciary
BeManaged June Newsletter: Modest Declines in World Equity Markets
The following topics are covered in this month’s Research Newsletter from the BeManaged Research Department.
- Modest Declines in World Equity Markets in May
- Consumer Confidence Dives in Latest Reading
Survey Reveals 89% of 401k Investors Want Asset Allocation Help
A survey conducted by the Boston Consulting Group found that investors find retirement planning is confusing and 89% want help creating their ‘investment recipe’ (aka asset allocation). Here are the other findings of the 2,600 investors surveyed:
- 84% want help “calculating and/or creating retirement income”
- 79% would like an annual review “to set and measure their progress”
- 48% feel they are “in consult of their retirement plan investments”
“Most Americans are busy with their jobs, their families and their personal pursuits, and say that they don’t have the time or interest to become experts in retirement planning,” said Lynne Ford, CEO of ING Individual Retirement. “The results from our study were clear: Americans want a roadmap to help them navigate to and through retirement.”
Ford added: “As a whole, consumers highly value choice, yet too much can be overwhelming. Consumers also value the control to make their own retirement-planning decisions but want detailed instructions on how to accomplish their financial objectives.”
BeManaged April Newsletter: “We’re Still Dancing!”
The following are some topics covered in this month’s Research Newsletter from the BeManaged Research Department.
- Market Environment Reminds Us of the 3rd Quarter of 2007
- New Form ADV Part II available
- Equity Markets End 1st Quarter on Positive Note
Getting a Tax Refund? Be Like the 50% of People Using it Wisely
Tax day is only a few weeks away. If you are receiving a tax refund, you have some fun decisions to make. A recent study found that only 31% plan to put some of the refund toward their retirement savings, and another 19% plan to pay down debt…meaning only half of people are taking steps to improve their financial situation with their refund.
We know. You get a check in the mail or it shows up in your checking/savings account. Saving it or paying down debt is about as fun and exciting as…well…I don’t know, but it’s not. Unfortunately, doing the right thing sometimes isn’t that fun. However, it is a good feeling when you do the right thing.
What should you do?
- Pay Down Credit Card Debt – Have a balance on a credit card that has been lingering? Use your refund to pay it down or get rid of it. It’s funny how making smart financial decisions can really feel good once it’s done.
- Start or Increase Your Emergency Fund – Do you only have a few hundred/thousand in cash for emergencies? Then you should probably deposit it there if you have no credit card debt. By having money in an emergency fund, you can avoid putting those emergencies on a credit card, thus saving you costly interest. A common recommendation is a minimum of one month’s expenses in your emergency fund.
- Make a Contribution to a Roth IRA – If both 1 and 2 are in good shape, put that money toward your future. You can’t over save for your retirement, so dumping that refund into a Roth IRA makes for a smart decision. If you don’t have one in place already, some smart places to do so are Vanguard, Charles Schwab, T Rowe Price, Fidelity, Scottrade, etc. Some people don’t realize that the most important thing about a Roth IRA is what investment you use inside it. Here are some things to consider:
- Only Use No-Load Funds – Loads are sales charges paid to brokers. You can avoid these charges, which many of the entities listed above offer.
- Consider Your Age, Time Horizon and Risk Tolerance – This can be tricky, so if you aren’t sure, use a Age-Based or Risk-Based fund.
Read the Report at PlanSponsor.com
Coming Soon to 401k Statements: Participants’ Account Balance as Monthly Income?
Fred Reish (he’s getting a lot of attention from us this month) and Bruce Ashton of Drinker Biddle  posted an article that discussed having 401k statements illustrate a participant’s account balance in the form of a monthly income. The article is illustrated below and we find this to be an excellent idea, but the following points would need to be considered in order create a consistent message across providers:
- Universal Equation for Computing the Monthly Income?- This is a key question, as there are many variables that could affect the monthly income projection, including these:
- Rate of return
- Target retirement age
- Annual salary increase percentage
- Distribution percentage
- Consistency Among Providers Could Be Critical - Why is this important? Let’s say there are two friends of similar age and account balances, working for different companies with different plans and they compare notes. If the providers have distinctly different methods of calculating the monthly income, there could be a lot of confusion if their projected monthly income is dramatically different. Additionally, the person with the same account balance but significantly lower projected income could conclude his 401k plan is inferior, even if investment options, funding (personal and employer) and overall plan expenses are similar. Instead, it could simply be a matter of the equation used.
- Concern - Providers might use more aggressive projections of retirement income as a marketing tool for institutional or retail services and products.
Here is the article by Reish and Ashton:
401(k) participants receive quarterly statements of their account balances. Surveys by providers and others generally report on 401(k) account balances in terms of averages, averages by age group, and so on. In other words, it is common in almost all reporting and any conversation about 401(k) plans to refer to “account balances.”But, the 401(k) industry—plan sponsors, participants, providers and advisers—are beginning to realize that the real purpose of 401(k) plans is—or at any rate should be—to provide monthly income in retirement. As a result, the government, and particularly the U.S. Departments of Labor and Treasury, are increasingly interested in retirement income. Providers and advisers are also focusing on the issue. This is due to the simple truth that, in retirement, 401(k) participants need to withdraw their money on a monthly basis to pay their mortgages, phone bills, rent, utilities, and so on. In other words, 401(k) accounts need to generate a monthly “paycheck.”In turn, that raises obvious issues about the appropriate way to invest and withdraw money in retirement. For example, a couple—both age 65—can reasonably expect that at least one of them will be alive—and need income—at age 95. (We are working on another article about on the probabilities of living to various ages. That article will be distributed in the next few months.) How can enough money be accumulated over 40 years, say, between the ages of 25 and 65, to provide a 30-year, prepaid retirement? It is difficult to do that. It is also difficult to properly withdraw money in a way that it lasts for 30 years. The sustainable withdrawal rates are surprisingly small, for example, 4% or 5% per year.About a year ago, the Departments of Labor and Treasury issued a request for information (RFI) about sustainable retirement income. The RFI asked about both insured and uninsured solutions. An organization that we support, the Institutional Retirement Income Council (IRIC), provided detailed and thoughtful responses to the questions. (As a disclosure, Fred Reish was part of the IRIC team that drafted the answers.)This bulletin quotes four of the questions asked by those agencies and provides the answers given by IRIC. The purpose of this bulletin is not to persuade you to agree with those conclusions, but rather to encourage you to think about the questions and answers. We believe that everyone in the retirement community—plan sponsors, fiduciaries, participants, providers and advisers—needs to have an answer, or perhaps multiple answers, to these questions. In other words, our purpose is to stimulate thought and encourage debate.401(k) participants receive quarterly statements of their account balances. Surveys by providers and others generally report on 401(k) account balances in terms of averages, averages by age group, and so on. In other words, it is common in almost all reporting and any conversation about 401(k) plans to refer to “account balances.”
But, the 401(k) industry—plan sponsors, participants, providers and advisers—are beginning to realize that the real purpose of 401(k) plans is—or at any rate should be—to provide monthly income in retirement. As a result, the government, and particularly the U.S. Departments of Labor and Treasury, are increasingly interested in retirement income. Providers and advisers are also focusing on the issue. This is due to the simple truth that, in retirement, 401(k) participants need to withdraw their money on a monthly basis to pay their mortgages, phone bills, rent, utilities, and so on. In other words, 401(k) accounts need to generate a monthly “paycheck.”
In turn, that raises obvious issues about the appropriate way to invest and withdraw money in retirement. For example, a couple—both age 65—can reasonably expect that at least one of them will be alive—and need income—at age 95. (We are working on another article about on the probabilities of living to various ages. That article will be distributed in the next few months.) How can enough money be accumulated over 40 years, say, between the ages of 25 and 65, to provide a 30-year, prepaid retirement? It is difficult to do that. It is also difficult to properly withdraw money in a way that it lasts for 30 years. The sustainable withdrawal rates are surprisingly small, for example, 4% or 5% per year.
About a year ago, the Departments of Labor and Treasury issued a request for information (RFI) about sustainable retirement income. The RFI asked about both insured and uninsured solutions. An organization that we support, the Institutional Retirement Income Council (IRIC), provided detailed and thoughtful responses to the questions. (As a disclosure, Fred Reish was part of the IRIC team that drafted the answers.)
This bulletin quotes four of the questions asked by those agencies and provides the answers given by IRIC. The purpose of this bulletin is not to persuade you to agree with those conclusions, but rather to encourage you to think about the questions and answers. We believe that everyone in the retirement community—plan sponsors, fiduciaries, participants, providers and advisers—needs to have an answer, or perhaps multiple answers, to these questions. In other words, our purpose is to stimulate thought and encourage debate.
fi360 Webinar Recording: The Combined Effects of the DOL’s Proposed Advice Regulation and 408(b)(2)
CEFEX and fi360 sponsored attorney Fred Reish to provide a thorough overview of the proposed advice and 408(b)(2) regulations. If you are a plan fiduciary who has hired a person or firm to provide your employees advice on their 401k, or an advisor/broker that works with 401k participants, this is essentially a must-listen event. The following were a number of interesting points which affect plan sponsors and advisors:
- Paradigm Shift – In Fred’s opinion, these regulations could change the face of 401k plans.
- “Proposed regulation will cause the current practices of many financial advisers and benefits brokers to be considered fiduciary investment advice.”
- All Advice is a Fiduciary Act – One time advice could be held to the same standard as an ongoing advice relationship, which is very common with 1on1 ‘recommendations’ or advice to participants, as getting in front of them on an ongoing basis can be very challenging due to schedule constraints.
- Point to Consider – If the last time an adviser/broker was able to advise ‘Sally Participant’ on her portfolio allocation was some time ago, and the portfolio allocation is no longer appropriate, the adviser/broker could be held accountable. A significant amount of liability could now fall on them and their firm.
- “96-1 Advisors” Need to Be Careful – There is a very blurry line between providing basic education and specific recommendations, which could now be absorbed into the fiduciary advice definition and responsibilities.
- Written Disclosure as a Fiduciary is Required – “The 408(b)(2) regulation requires a written disclosure if a service provider “reasonably expects” to be an ERISA fiduciary.”
- Point to Remember - It’s an adviser/broker’s actions that dictate whether they are a fiduciary, therefore just because they are avoiding a written agreement, that does not mean they are not a fiduciary. However, if they ARE acting in a fiduciary capacity, a Plan Sponsor should ensure that they have a fiduciary agreement in place with them.
Click Here to View the Webinar Recording / Slides at fi360.com
(basic contact information is required, and you will simply receive their email newsletter, which contains great content)
5 Participant Success Features to Add to Your 401k Plan
Last month, we brought on a new client who was going through a provider change. During our interaction with their employees, we were shocked to find what their old 401k provider DIDN’T offer compared with what their new provider DID. For the sake of full disclosure, we tend to be a little naive in assuming that certain features are a given when it comes to the capabilities of 401k provider websites. That being said, it’s 2011. I can order a burrito from my phone. Thus, the following is a list of basic online tools (in our naive minds) that we have found participants enjoy, and quite frankly expect in today’s digital age:
- Online Contribution/Deferral Increases – This functionality is available in a handful of the plans we work with, in which a participant can change the amount they are contributing to their account with a few clicks of the mouse. In our experience, investors are much more likely to increase their contributions if…and this is key…it’s easy to do. In other words, no more getting the form from HR. Contrary to popular belief, a lot of participants want to do the right thing and save, so let’s make it easy for them to do so. The pain-in-the-tail paper forms of old allow the opportunity for too many investors to shrug off saving more due to it being considered a nuisance.
- Online Annual Contribution Increase – On the same note as #1, the auto-increase function allows the participant to activate an automatic increase of 1% – 3% at a specific date of their choice. The benefit is that if they forget to increase their savings annually, just as most forget to rebalance their portfolio, the system will automatically do it for them specific to the investor’s preference. Now, if they would just remove the 10% auto-increase contribution cap , but that’s another conversation…
- Take-Home Pay Calculator – Whatever you want to call it, it answers the question of “how much will it cost me to increase my contributions?” Â If an investor can get a feel for approximately what a contribution increase will cost them from their check, they are much more likely to take action. Times are tough, but this tool helps people understand whether they can ‘afford’ to increase their deferral rate. It doesn’t need to be pretty, just effective. Our favorite is a plain brown box, but it is simple, quick and effective.
- Custom Date Portfolio Returns – We have seen some very large plans’ providers that do not offer this feature, and it is kind of stunning. In our own selfish interests, we use this feature to help investors determine their risk/reward objectives during our 1on1 consultations. It is very powerful and another tool that participants simply expect in today’s technology environment. Can a participant see how the amount of risk in their portfolio affected them during the downturn of ’08 and early ’09? When the market began it’s rebound on March 9, 2009 through the end of ’09? We understand this is pretty complex with contributions, but…again…I can order a burrito with my phone. My. Phone.
- Basic Diversification of Stocks/Bonds in Portfolio – The vast majority of 401k plans have actively managed mutual funds/investment options available. The underlying mix of stocks, bonds, cash, etc. can and often does change throughout the year. Hence, providing participants an idea of what their underlying basic diversification is of US Stocks, International Stocks, Bonds and Cash is very important so they can better understand their situation. Seeing a list of funds an investor invested in is one thing, providing them some basic information on the make-up of that portfolio is another. This is another feature that we are blown away not to see with some provider sites. NOTE TO PROVIDERS: User percentages, not just hard dollar amounts. Keep. It. Simple.
As you can see, each of these features can greatly benefit participants as well as those trying to help them understand what is or isn’t happening with their retirement account. Give them the tools, and they will act. Are there any we missed that you would add to this list?
WSJ – Once Bitten, Twice Bold: Look Who’s Buying Stocks Now
Jason Zweig is one of my favorite writers at the Wall Street Journal. Last weekend, he wrote an interesting article regarding some of the classic sell low, buy high behaviors taking place due to the sustained gains of the market rally that is now nearing 24 months in length. It’s a must-read for anyone wanting to learn what NOT to do with their portfolio. Here are a few snippets from the article:
- …many of the investors who are aggressively getting back into stocks are the very same people who fled the equity markets in the fourth quarter of 2008 and the first quarter of 2009, just before it embarked on a historic rally.
- These are the sheepish bulls—people who know they sold low two years ago and worry that they are buying high today. In some cases, financial planners say, these clients are asking to hold even more in stocks than they did before the market crashed.
Over the past few months, the Wittes have moved back into stocks. “I’m back to about 40% equities,” Mr. Witte says, “and I want to be at more.”Does he worry that, having bailed out near the bottom, he may be getting back in near a top? “That’s certainly a good question. I suppose some might call us foolhardy,” Mr. Witte says. He adds, “We don’t have any regrets. I think the market is there to protect what you have when you’re a retiree.Over the past few months, the Wittes have moved back into stocks. “I’m back to about 40% equities,” Mr. Witte says, “and I want to be at more.”
Does he worry that, having bailed out near the bottom, he may be getting back in near a top? “That’s certainly a good question. I suppose some might call us foolhardy,” Mr. Witte says. He adds, “We don’t have any regrets. I think the market is there to protect what you have when you’re a retiree.
For the record, Mr. Witte is a 73 year old retiree…and the market is not protective of anything but change.
The point is that some investors are demonstrating the classic (and highly detrimental) behavior of trying to time the market. These individuals fled to cash near the bottom, and are just now getting back in…after a historic 24 month rally. Are they buying high after selling low? Time will tell.
Read Jason’s Article at WSJ.com
Survey Demonstrates Better Results for 401k Participants Using Advice
A recent study illustrated finds that 401k participants using advice are better diversified and have larger balances. Here are some interesting findings of the survey:
- Improved Diversification – Participants held 74% more funds in their portfolio (8.67 versus 4.98 funds)
- Improved Performance – 3 Year Annualized Return was 2.67% better than do-it-yourself investors
- Larger Balances Seek Advice – Average balance of participants using advice was $107,558 versus $44,178 of do-it-yourself investors
These results are very similar to our experience with 401k investors. We find that participants using advice (or managed accounts) are better diversified and experience better downside protection due to improved risk management. Additionally, the larger the balance, the more likely the participant is to seek advice.
“The numbers tell us that participants with larger account balances are the ones who seek out advice, which helps them continue to move ahead,” said Kelli Send, Senior Vice President, in a press release. “However, the study results argue advice for all will improve diversification and performance.”
Read the Article at PlanSponsor.com
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