The new and changing world of 401(k)s

For SBT
In today’s hostile and volatile investment climate, probably the last thing on your mind is either your or your employees’ 401(k) plan. On the other hand, if we have reached the bottom of the market pit, as some analysts argue, then quite possibly this could be a timely issue for all of us as employers.
As usual, let me give credit where credit is due: this month to Karen Casanova, CEO of 401(k) Advisors, LLC., a Brookfield-based firm with securities offered through Packerland Brokerage, member SIPC and NASD. Her firm helps companies strengthen their 401K plans by assessing various risk/reward possibilities, while lowering the actual costs of plan implementation. She can be reached at 414-617-4004.
First, let me point out that only one-third of all full-time American workers are offered a 401(k)-type investment plan at their jobs, and about 10 million Americans are self-employed. To give you some idea of the magnitude of these programs, currently there are $1.7 trillion in 401(k) assets. The most common plans are profit-sharing, savings, and money-purchase plans. Actually, any defined contribution plan that permits employees to contribute on a tax-deferred basis can be a 401(k)-type plan.
Regardless of the plan type, the intention is to encourage people to save for retirement. We have all been beaten ad nauseam with the fact that Social Security will never be able to meet the retirement needs of our generation, much less that of our kids or grandkids.
By the way, in the case of 401(k)s, the most common savings practice is for the employer to match 25 cents on each dollar up to 6% of what the employee contributes. There are vesting options that apply to the employer. However, employees are vested immediately on their portions of the contribution.
Second, and now looking at 401(k) plans in particular, two major problems I see with the industry are (a) hidden costs of the investment contract and, (b) lousy communication with employees that prevents them from truly understanding this great under-rated employee benefit. Further, these problems surface in one or all the components of a retirement plan: investments, administration and service.
For instance, on the investment side, according to Casanova, it is practical and desirable to use what is termed a “multifund platform.” That means that funds can be purchased directly without insurance or bank wrap fees. Those fees can, on average, amount to 1% (or more) of a fund’s net value. So for a million-dollar fund, this could amount to $10,000 for the investment expense alone.
Again on the investment side, owners sometimes experience the unpleasant piece of news that investment returns are poor, while not understanding hidden investment costs that have no correlation with investment results. Sound familiar in today’s market environment?
The administration of 401(k) plans can be a labyrinth of technical jargon “in compliance with” Department of Labor and ERISA mandates. Casanova reports that there is some evidence that one out of three companies changes administrators once each year. In other words, finding a qualified administrator who meets and understands your needs, while taking a proactive but Department of Labor and ERISA-sensitive position with your 401(k) plan, is easier said than done.
Another example of administrator complacency was the failure to advise a client that the maximum qualifying income for calculating profit sharing contributions involving their particular plan year changed on Jan. 1, 2001.
Finally, servicing 401(k)s can really separate the men from the boys. Excellent service, according to Casanova, means that an agent should provide an investment policy that monitors the company’s funds’ performance at least quarterly.
To do that, for example, an objective analysis of each fund’s performance, against known industry data points, must be accomplished (i.e., identifying returns against peer groups and risk ratios). That should be done in a reporting format that is easy for the owner and employees to decipher.
That leads to the communication side of the 401K service commitment. An agent needs to speak a language that is not full of industry jargon and gobbledygook. If voluntary attendance at a 401(k) review session is sparse, there is a good chance that the agent is talking to a drum-beat that employees don’t comprehend.
Casanova concludes her advice by suggesting that agents should not have additional “advisor fees.” She pointed to a 200-employee firm that was being assessed investment, advisory and administration fees and was not receiving the service level discussed above.
One way to avoid this is to sign a mutually acceptable service agreement with the agent that covers all the major costs for investment, administration and service.
In my opinion, 401(k) plans in particular and profit-based retirement plans in general are a great employee benefit in the short run and a great societal contribution in the long run. I hope you are among the one-third of all full-time working Americans enjoying this benefit.
Until next month, happy 401(k)-ing it!
Harry S. Dennis III is the president of TEC (The Executive Committee) in Wisconsin and Michigan. TEC is a professional development group for CEOs, presidents and business owners. He can be reached at 262-821-3340.
August 31, 2001 Small Business Times, Milwaukee