As I've discussed in prior blog posts, 401(k) account balances for many Americans have recovered as a result of better financial markets and ongoing contributions. In tandem, the debate over 401(k)s has shifted, to the question of fees.
Critics share a common complaint: 401(k) fees are too high.* I've been asked this question in this way: Why aren't 401(k) plans as cheap as a low-cost Vanguard index fund? The Vanguard 500 Index Fund, for example, carries a current expense ratio of 0.18%. By comparison, the median 401(k) plan, according to one study costs about 0.70%, nearly four times as much.
Why the difference? There are four reasons.
First, 401(k) plans require a more complex infrastructure than a retail investment account. I won't go into the details (that would take its own post), but 401(k)s offer a more complex, and expensive, array of administrative services than a typical retail investment account or IRA.
Second, most 401(k) plans offer higher-cost actively managed funds, along with a few passive choices. For example, 96% of the employers who have chosen Vanguard as their 401(k) recordkeeper also have decided to offer active funds. Having weighed the issue, employers choose to offer both types of funds.
Third, and more subtly, 401(k)s are subject to what economists call "economies of scale." Large companies are able to spread recordkeeping costs over a large base of workers; they can also get price discounts on indexing or active management that come with "bulk" purchasing. In layperson's terms, a plan with 10,000 workers will get lower prices than a plan with 100 workers. The same is true with the size of assets to be invested. So a big difference in fees across 401(k) plans is influenced by how big the plan is.
Finally, fees are influenced by the assets accumulated by participants. Suppose you have two 401(k) plans, both with 1,000 plan participants and both with the same services. Company A consists mostly of higher-paid, long-tenured engineers who have accumulated larger account balances. Company B, a chain of retail shops, has many short-tenured, lower-income workers with smaller balances. All things equal, to generate the same dollar amount in fees, participants at Company A will be charged a lower rate (on their larger balances), and participants at Company B a higher rate (on their smaller balances).
The dynamic nature of the job market only exacerbates this issue. Employees change jobs or retire and then roll over their savings to an IRA. As a result, the 401(k) system is always losing money to IRAs, especially large balances at retirement that, if retained, could drive down 401(k) costs.
So what's to be done? Actually, a lot is already being done (a point often missing in some critical articles). A regulatory project has been under way to encourage greater fee-consciousness for several years. The government recently issued the final set in a series of regulations. The project mandates certain 401(k) fee disclosures to the government, employers, and participants. The initiative has the full support of the 401(k) industry, the mutual funds, money managers, banks, insurance companies, independent recordkeepers, consultants, and actuaries who make the system work.
Will better information mean lower costs? Certainly better information is a prerequisite for the tougher price negotiations. The new regulations can be thought of as a behavioral finance "framing" exercise in which human decisions are shaped by how information is presented. The new disclosures are certain to make everyone in the 401(k) system more fee-aware.
At the same time, there are limits to what regulators can do. The new regulations won't eliminate economies of scale. They won't eliminate disparities in incomes, tenure, and asset accumulation among plans. But they are certain to make price comparison shopping easier, and also highlight the enduring question of active versus passive management.
Which sounds like the right thing to do.
Learn how this may impact you
This past October, the Department of Labor (DOL) introduced new regulations under section 404a-5 of ERISA. These include new participant-level disclosure requirements for plan sponsors and are part of the DOL's ongoing push for fee transparency.
The new regulations, which apply for plan years beginning on or after November 1, 2011, mean plan administrators will be required to:
Provide employees with plan-related and investment-related information on or before they direct their investments (and each subsequent year),
Provide employees with core information about investments available under their plan (including the cost of those investments),
Use standardized methodologies when calculating and disclosing expense and return information,
Present the information in a format that makes it easier for workers to make comparisons, and
Provide employees with access to additional investment information beyond the basic information required under the final rule.
The DOL says its goal is to give participants user-friendly
information to help them manage and invest the money they contributed to their
As you know, John Hancock already helps you provide your participants with access to information in their enrollment kits, quarterly statements and through the Participant Website and our Customer Service Representatives. We are reviewing the new provisions set out under 404a-5 to determine whether any changes to our materials will need to be made to help you meet these new participant disclosure requirements.
We will continue to monitor the implementation of 404a-5 and will keep you informed of any new developments going forward. For more information, we encourage you to visit the Legislative and Regulatory Information (LARI) page on the Plan Sponsor Website or to contact your Client Account Representative.
Written by: David Wray
In 2011, but only in 2011, the FICA taxes on our wages have been reduced by 2%. This is a great opportunity to boost retirement savings. I suggest that America's workers save that 2% in their 401(k)s. This could have a significant impact on amounts available for retirement, especially for younger workers who will earn a compounded return on the amount for decades. Also, this action will lower a saver's federal and state income tax in 2011 as the contribution will be tax-deferred. Finally this action will help the economy. Saving in a 401(k) helps stimulate economic growth. The Social Security tax reduction is a 401(k) opportunity.
LOS ANGELES, Jan 12, 2011 (BUSINESS WIRE) -- Many Americans may be missing out on a valuable credit this tax season. The Internal Revenue Service's retirement "Saver's Credit" is available to low-to-middle income workers who are saving for retirement, yet very few workers who may be eligible know it exists. In fact, only 12 percent of full-time American workers with annual household incomes of less than $50,000 are aware of the credit, according to the 11th annual Transamerica Retirement Survey.
The Saver's Credit may be applied to the first $2,000 of voluntary contributions an eligible worker makes to a 401(k) or similar employer-sponsored retirement plan, or an IRA. Credits of up to $1,000 for single-filers, and $2,000 for married couples, are available.
"The Saver's Credit is a meaningful incentive for low-to-middle income individuals and households to save for retirement. Unfortunately, few are aware that it's available," said Catherine Collinson, president of the Transamerica Center for Retirement Studies(R). "It's important that we work to raise awareness of this wonderful tax credit and opportunity to save for retirement so that more workers may take advantage of it and improve their chances of financial security down the road."
How to Claim the Saver's Credit
The credit is available to workers aged 18 years or older who have contributed to a company-sponsored retirement plan or IRA in the past year and meet the Adjusted Gross Income requirements. Single filers with an adjusted income of up to $27,750 in 2010 or $28,250 in 2011 are eligible. For the head of a household, the adjusted income limit is $41,625 in 2010 and $42,375 in 2011. For those who are married and file a joint return, the adjusted income limit is $55,500 in 2010 or $56,500 in 2011. Additionally, the filer cannot be a full-time student or be claimed as a dependent on another person's tax return. Workers can take the following steps to claim the credit:
If you are using tax preparation software to prepare your tax return, use Form 1040A, Form 1040 or Form 1040NR. The credit is not available with Form 1040EZ; however the IRS has included instructions with the EZ form directing you to a different form if you choose to claim the credit. If your software has an interview process, be sure to answer questions about the Saver's Credit, Retirement Savings Contributions Credit and/or Credit for Qualified Retirement Savings Contributions. If you are preparing your tax returns manually, complete Form 8880, the Credit for Qualified Retirement Savings Contributions, to determine the exact credit rate and amount. Then transfer the amount to the designated line on Form 1040A, Form 1040 or 1040NR. If you are using a professional tax preparer, be sure to ask about the Saver's Credit.
NEW YORK, NY, January 13, 2011 -- Mercer has published its "10 for 2011" checklist of New Year's resolutions that US defined contribution (DC) plan sponsors should make now to address investment and plan-design concerns, fulfill fiduciary responsibilities and help participants meet their retirement objectives.
2011 is likely to be a year of transition as the economic recovery slowly gains stronger footing. Despite the improved economic outlook, however, baby boomers face meaningful challenges as they begin the transition to retirement, while younger workers continue to struggle with prioritizing retirement over short term financial needs. Sponsors have the challenge of constructing programs that address the very different needs within their participant populations while complying with a new round of significant regulatory requirements.
"Investment line ups continue to evolve as plan sponsors work to best meet the needs of participants," said Toni Brown, Partner in Mercer's Investment Consulting business. "For 2011 in particular, sponsors may want to consider offering an inflation hedge option; evaluate spend-down products that seek a balance of growth, capital preservation, and liquidity; and look to October for the results of the Federal government's study on stable value wrap contracts."
"Over the past several years, there has been greater policy attention and regulatory scrutiny around DC plans as these become the sole retirement vehicle for many Americans," said Amy Reynolds, Partner in Mercer's Retirement, Risk and Finance business. "Plan sponsors are continuing to evaluate Roth options and other low cost design features while evaluating the impact of recent automation trends. We foresee that 2011 is going to continue to be a challenging year as new disclosure rules will be a key area of focus for sponsors and their record keepers. Looking forward, we expect continued focus by participants and regulators on defined contribution plans. Sponsors need to stay abreast of changes and trends, and respond appropriately."
Mercer's "10 for 2011" New Year's resolutions for DC plan sponsors:
1. Participant Fee Disclosure
New rules are coming in 2012. Determine what's required, who's responsible and how to integrate the new requirements with other plan communications.
2. Fee Oversight
Establish a policy for ongoing fee benchmarking. Receive all required disclosures. Document your oversight in a fee policy statement.
3. Stable Value Wrap Contracts
A joint study by Federal regulatory agencies (to be completed by October 2011) will determine whether stable value wrap contracts are exempt from the swap restrictions of Title VII of the Wall Street Reform and Consumer Protection Act (current wraps are grandfathered). Should capacity exist, make increased diversity in your line up a priority in 2011.
4. Inflation Hedge Option
Consider adding a diversified inflation hedge option to your line up. Evaluate a diversified option versus a Treasury Inflation-Protected Securities (TIPS) option. Near-retirees benefit most from inflation hedging options.
5. Retirement Income Solutions
New retirement income products and modeling tools continue to hit the market. Plan sponsors should understand the available solutions to determine if one or more are appropriate for their demographics.
6. Participants Nearing Retirement
Investment performance is critical for near-retirees. Do their investment strategies match expected spend-down needs? Would retirement planning seminars and other assistance reduce financial anxiety (and its drag on productivity)?
7. Roth 401k Contributions
In tough economic times, consider a low-cost plan enhancement, such as a Roth, that expands financial opportunities for participants.
8. Managed Accounts and/or Investment Advice
Should you offer participants advice or managed accounts (or both)? Should you take advantage of improved access to custom target date funds, which allow tailored glide paths based on your core options?
9. Auto Features
"Set it and forget it" doesn't work for plan sponsors! For example, should auto-enrollment contribution rates be increased? Are vesting and withdrawal provisions still appropriate for your organization?
10. Plan Operations
The Internal Revenue Service and Department of Labor are focusing on defined contribution plan compliance and recommend periodic review of plan operations both against the terms of the plan and against governmental requirements.
Issued by: FinancialPlanners.net
Date: Friday, January 14, 2011
Senior financial planners are key to a successful retirement, especially since Americans are increasingly reaching the age of retirement without the funds to do so comfortably
BOSTON, Jan. 13, 2011 -- With the baby boomer generation nearing retirement age, independent financial planners are in high demand. These advisors are much like other professionals in the field; however, they generally specialize in the fiscal situations, needs and services that are unique to senior citizens. More often, people are nearing retirement age without the proper savings. Senior financial planners insist that is it never too late to seek advice to develop a strategy of money management.
The older people get, the more important it is to handle financial planning. This is because the working years are dwindling along with the time to save for retirement. Senior financial planners can help sort out the best ways to retire comfortably. When talking to a planner, there are many items to address. If the client is still working, how much longer should they do so? How will the impact of certain benefits, such as Social Security, change when retiring at different ages? When should contributions be made to a traditional or Roth IRA and when should 401k withdrawals begin?
Parents' roles change as they and their children age. They can consider their life insurance plans and their home. As children get older and become self-sufficient, life insurance policies can be scaled back. A large house also can be downsized. If there are many rooms sitting empty, it can be sold and a smaller one can be purchased to save on monthly expenses. This also gives the opportunity to move to a climate that is more desirable. Another housing consideration is assisted living facilities.
Health insurance must also be considered. Depending on an individual's situation, perhaps working for even a few more years to stay on an employer plan may have a large impact on future financial planning. Health care is often overlooked when considering expenses in retirement, especially since Medicare does not cover all costs.
The details of planning for retirement can be complex and seem daunting. Working with senior financial planners can help take the worry out of this important area and make retirement successful and comfortable.