Thursday, February 26, 2009
Shifting the 401(k) Expense Load To Participants
As companies continue to trim payrolls and overhead, the conversation eventually includes the 401(k) Plan. Much like the Health Plan, there are new questions about how much of the plan’s expenses can be transferred to participants, and which expenses must be borne by the employer.
In many cases, there is also a Forfeiture Account, which includes matching contributions for participants who have left the company before they were fully vested. Can this account be used to pay expenses? and, if so, which ones?
Fortunately, Cathy Waxenberg. President of Laiken Associates in NYC, has posted a guide for this complex subject: Payment Options for Plan Expenses.
If you are thinking of reallocating your plan’s expenses, this is a “must read.”
Sunday, February 22, 2009
Are Terminated 401(k) Participants Still Costing You Money?
The answer to this question is almost certainly “yes.” Former employees/participants don’t always focus on moving their accounts to their new employer or a rollover IRA, and it’s easily forgotten by plan administrators. There are at least two ways that this could be costing you money—perhaps a LOT of money:
1) Most vendors charge a “per participant” fee for recordkeeping, which includes anyone with an active account (even former employees).
2) A key pricing consideration for vendors is “average account balance,” that is, the amount of assets divided by the number of active accounts. If you have a significant number of small accounts for former employees, it may be costing you by dragging down the average
And of course there are the fiduciary issues: you are still required to provide the same information and reports to a population which is on the move and not always easy to locate. If you have changed vendors recently, you know what I’m talking about. You spend valuable time and resources tracking down people who don’t even work there any more.
You can start the process with old accounts that are less that $1,000, which you are allowed to force out of the plan. In addition, if your plan document allows, you can roll the $1,000 - $5,000 acounts into IRA’s (your vendor or advisor can organize this). If there are other accounts above these thresholds, you can contact them and suggest a rollover.
Sunday, February 15, 2009
401(k) Fund Performance - Don’t Make It Worse Than It Is
There may actually be a bright spot within the current economic climate. As companies struggle with the cost of their benefits packages, here is an easy way to provide increased benefits at little of no cost: review the investment lineup in your 401(k) Plan. Unless you have done this recently, a lot has changed over the years. We know of one popular fund which had a long and impressive track record, only to fall to the bottom quartile of it’s peers…and stay there.
And although performance is important, it’s important to know HOW that performance was achieved. Under pressure to perform, did the manager stray beyond their stated objectives? Or did they add a significant cash component to the portfolio until this all blows over? Those are two of the bad ideas we’ve seen, but not the only ones.
At the end of the day, plan participants (yourself included) will appreciate the fact that you’re being proactive and concerned about investment returns. The less money you lose in this market, the faster you can come back. Don’t forget, if you have a 50% loss, it takes a 100% gain just to get back where you were.
Friday, February 06, 2009
It’s Not Business, It’s Personal
If you’ve watched enough underworld crime dramas, then you’ve heard the expression: “hey, it’s business ... it’s not personal.” Someone is doing something to you for BUSINESS reasons, so don’t take it personally.
But what about in 401(k) Land? What if the CFO (and their committee) has done something which results in a monetary damage for breach of fiduciary responsibility. Funds weren’t monitored, there was a prohibited transaction, someone received investment advice from Human Resources and lost a lot of money ... the list goes on. Most CFOs don’t understand that this is a personal liability, not a company issue. In other words, “hey, it’s not business ... it’s personal.”
Everyone with a 401(k) account is in a pretty sour mood right now, and some have been laid off, to boot. People are looking around for someone to blame and there is an awful lot of information on the internet on this subject. If someone decides to come after you with a complaint, it’s best to have your Fiduciary House in order now ... not when you receive mail from the Department of Labor. Contact your vendor or advisor and ask for a fiduciary review to see if you are at risk, before it gets personal.
Monday, February 02, 2009
A 401(k) Freshness Date?
If only it were so. We’ve become quite used to seeing this information on everything from cereal to vitamins, and it’s a good reminder that nothing has an indefinite shelf life. In the benefits world, we get the same type of reminder when a company health plan renews and the CFO needs to decide on a higher deductible, a different carrier, or a different contribution level for employees. The cost of the plan usually goes up unless you do something about it.
But the 401(k) plan goes on and on until someone complains or there is a random event (like a change in management). Because this is a dynamic industry, with a consolidation of carriers and the equivalent of an arms race to provide the best funds at the lowest cost and still have all the “ancillaries,” the expenses are actually coming down. Picture an up and down escalator next to each other, one is the rising value of the plan (contributions + asset growth) while the other is a constant downward trend in cost.
ERISA requires plan fiduciaries to monitor the cost of the plan, but now there is even more incentive to benchmark your program: a cost savings which drops right to the bottom line. Often times you can renegotiate with your current carrier and avoid the hassle of changing. Just find out what they are offering to a new plan with the same characteristics as yours, and insist on the same deal. At the end of the day, it’s cheaper for the carrier to accept a reduced profit margin than to bring on a new client.
We recommend that you spot check your 401(k) plan every year and conduct a full search every three to five years. At least until the industry adopts a freshness date.
