A few good New Year's resolutions for 2010
by John Hanahan
Changes being contemplated by House compel business executives to take another look at how their 401(k) plans are being administered. Documentation, issue of ongoing advice will be keys.
Tell me if this sounds familiar: Your company has a 401(k) plan enrollment/educational meeting. The representative from the provider talks about how important it is to save, to diversify, the power of compounding, etc. As you listen attentively, they drop the bomb: “Please turn in your investment elections by 4 p.m. this Friday.”
“What?!?!?! Why won’t someone just tell me what to do … I need some help!”
But when you ask questions of your representative, you get vague answers. You sit down to select your investments. There are so many to choose from. You find yourself being drawn to the investment options that have performed well in the past. It’s really human nature: Why would anyone select an investment that has not done well in the past, right? So each year or two (or four), you sit down and get rid of the invesments that have not done well and put them in the ones that have, thus perpetuating the pattern of “buy high, sell low.” If this sounds fam-
iliar, you are not alone.
Hard lessons in investing
John Hancock Retirement Plan Services studied its 401(k) retirement plans for the period of 1997–2006. The study showed that plan participants who chose to allocate their investments to a single Lifestyle Portfolio (a risk-adjusted diversified mix of investments) earned, on average, 7.2 percent, compared with 5.3 percent for non-Lifestyle participants. The study offered several reasons to explain the difference in performance, including insufficient diversification, failure to reallocate/rebalance, and adopting risky strategies at market extremes (yes, going to cash during market panics is risky).
Participants in 401(k) plans need a mechanism to get them into investment options that will deliver ongoing investment advice. If you can provide your employees guidance in this area, you will be doing them a great service.
If you are a fiduciary for your company’s 401(k) retirement plan (and you are if you are the owner/CEO or trustee) there is a House bill that will most likely make the task of evaluating your current 401(k) provider move to the top of your “to do” list in 2010. In June of 2009, the House Committee on Education and Labor approved the 401(k) Fair Disclosure and Pension Security Act of 2009. The Department of Labor and Congress are trying to address two basic issues: First, high fees; second, a lack of ongoing investment advice.
Mandates from D.C.
The bill, backed by Democrats (Rob Andrews of New Jersey and George Miller of California, would require plan sponsors to disclose fees to plan participants, as well as address any potential conflicts of interest arising from employers trying to deliver investment advice to their participants. Although the bill is still a work in progress, Andrew’s proposal would pro-hibit employers from hiring brokers or registered representatives to serve as investment advisors to participants in 401(k) plans.
That certainly seems to be a bit on the extreme side, but we’ll see.
The point is that the bill, if passed, will require plan sponsors to document their process for determining whether their fees are appropriate, and also require them to address the lack of ongoing advice for their employees.
So why not make a New Year’s resolution to improve your plan for your employees? It could turn out to be a win-win situation—and make you feel good about yourself.
John R. Hanahan is a financial planner for Yukon Wealth Management in Overland Park, Kan.
P | 913.681.9200
E | jhanahan@yukoncm.com