The Dreaded Investment Committee Meeting

Are you interested in being on the Investment Committee for your employer-based retirement plan?  Really?  Or would you rather quit your job?  When I talk with my clients about their investment committee,  I get this look like “Do we really have to do this?”

Well, these don’t have to be an awful experience and they have the potential to serve an important function for any organization wanting to provide a valuable retirement benefit for the staff.  But I think many of these committee meetings emphasize the wrong issues.  Prior to setting up PlanVision and being able to craft these meetings in the way that best benefits smaller firms, I had to sit through a couple of these.  While well run by highly compensated professionals with many designations, they were an inane waste of everyone’s time and money.

These meetings typically included a recap of market forecasts (what just happened) using a bunch of statistics and graphs designed to impress; a forecast that was some wild guess that included a statement similar to “we would expect stability, or possibly some volatility, and market growth of 4 to 6% in the next 9 to 12 months, unless other unanticipated events…”;  and then we would review the performance of the funds and identify the ones that had done well and those that were being “watched.”  (Does this sound familiar to anyone who has been on one of these committees?)  This process was the bulk of the meetings and was designed to showcase the expertise and proprietary skill of the advisers or consultants to justify their fees.

Of course this is nonsense!  I don’t want to have any involvement in a committee that prioritizes this drivel.  Here is what an Investment Committee should cover (in order of importance):

1)  Employee Understanding.  Do the employees understand your plan and are they benefiting from it as much as you want?  Are there new ideas you could try to help more of the staff? This should be the focal point of the meeting, not the last 10 minutes.  And it is a great idea to have rank and file in the meeting and not just management or executive leadership.

2) Industry Trends.  It is important to be aware of any changes brewing in the industry that may affect your plan.   You want to know what might be coming.

3) Plan Structure.  Is there anything with your plan that needs to be changed or altered? Should you go to auto enrollment or escalation?  How is eligibility working?  Review any features of your and how they affect its operation.

4) Vendor Performance.  Are the service providers doing their job?

5) Investment Performance.  Finally we get to this.  Yes, it is wise to review how the investments and markets are performing.  This needs to be done.  But it should be a relatively small component of the session.  Since my clients use mostly index investments, this is a simple process for all involved.

There you go!  These are suggestions – the importance of each topic will vary due to the unique nature of your employer’s workforce and retirement plan.  But focusing on these elements, in this order, should help you run a more interesting and meaningful Investment Committee.



What to Expect from Your Investments

Recently, a friend inquired with me about the quality of advisement he was receiving on his investments.  He uses a conventional investment firm, a household name in the financial services industry, and pays an assets under management charge.  He is clearly familiar with the concept of using low-cost index funds, however has opted to use an advisor to generate returns that are greater than what he could get with a portfolio of low-cost index funds.

Since he asked for my opinion (I rarely talk investments with Family or friends), I told him that he should leave his advisor and index his mix and provided some comments on why I believe that would be the best approach.  While he is not ready to make this change I think he has a better sense of an alternative approach he can take which would be much more low cost and simplified.  In the course of our e-mail and phone discussion, he shared with me the e-mail chain with his advisor.

It was a good exchange about the approach that they were taking.  However, I found two explanations to be bogus and discouraging, though quite typical.  The first was simply an explanation that 2014 was a hard year for investors to outperform due to unusual issues and circumstances. Really?  Couldn’t that be said about almost any year?

The second was more troubling.  My friend had taken a portion of the portfolio and decided to be more “aggressive” with it.  Obviously, the intention was to generate higher returns.   However, as is the case many times when an investor does something like this, the returns were not satisfactory so far.  The advisor suggested that they give it a few more months or until the end of the year to see what happens and evaluate.  I can tell where this is going.  This approach is destined for failure.

You cannot micromanage a long-term strategy on a quarterly or even annual basis.  The advisor is creating a trap for himself.  If he has established the notion with the client that they can “juice up” returns in the short run with certain investments, and the client expects that, I see almost no scenario where this ends well.  “Aggressive” investments, whatever they happen to be, simply do not behave this way.  More than any other type of investment, they need to have a very long-term time horizon for success.  If we could all get get better returns with more aggressive investments, wouldn’t we just use aggressive investments for everything?

But there are no end to advisors that will imply that they have these type of opportunities!

Flat Fee Your Retirement Plan – DO IT NOW!

One of the best ways that you can improve your employer based retirement plan is to decide that you will only pay for much of your plan services on a flat fee basis. This is a really big deal, so get it done!!

Unfortunately many plans bundle their services together and pay them as a percentage of assets or, even if they are not bundled, still pay for their record keeping and advisory services (which I would simply refer to as help for the plan or the employees) as a percentage assets.  This is bad policy and unnecessary.  Both record keeping and advisory services can be major components of plan costs. However, both of them are also services that can be provided on a time and materials basis.  Many record keepers can price out their services, or at least the bulk of their services, on a per participant or a per eligible participant (yes, those are different) basis.  Makes sense, right?  You pay based upon the number of people in your plan.

Let’s look at an example to see how this might work.  Let’s say your plan has $3.5 Million in it, and you pay on a percentage of assets basis for both record keeping and advisory services – in this case I will simply lump them together – .75%.  Your total cost would total $26,250.  But what if you broke out the services and billed them on a flat fee and one came in at $10,000 and the other at $4,000.  That is an annual savings of $12,250.  Smart!

Of course, a retort would be: “What if the flat fees came out higher than the percentage of assets? What about that, smart guy?”  Well, the reason I am suggesting this is because I think in the vast majority of cases that won’t happen! And if it does, then keep paying on a percentage of assets basis. That is easy enough, right?

It gets worse.  The really awful part of this situation is that as the assets grow in the plan over time, which is generally what happens, the plan, and the plan participants keep paying more, and more, and more money for these services. And the additional labor for this work should not grow at the same rate.

Some fees may need to be charged as a percentage of assets.  Fund fees and typically a plans’ trust services will be charged as a percentage of assets as well.  But those are the only two that should be charged in this manner.  While I am not an advocate of this because I believe that using either Vanguard Target Date Funds or Lifestrategy is a great way to get excellent asset allocation, some plans will also offer asset allocation services on a percentage of assets basis too.  If so, this fee should not be greater than .25%.  And, I should add, the plan sponsor should take a shot at trying to negotiate these on a flat fee basis as well!

By the way, the other contenders for the most important ways to improve plans would be to eliminate all revenue sharing, using index funds, and providing personal guidance to plan participants from a fiduciary.  I have addressed those in other posts and will discuss again in the future.

Using a Roth IRA as a Retirement Plan-College Savings Hybrid

Should you save for retirement or for a child’s college education?  This can be a dilemma for many middle class people with limited funds who have an interest in saving for both.  One way you can kinda do both at the same time, with one account, is by using a Roth IRA.  Here is how it works:

Assuming you can fund a Roth IRA (most middle class people can) in 2015, people under 50 can contribute $5,500 and if you are 50 or over you can contribute $6,500.  The benefit of a Roth IRA, as you might recall, is that the interest you earn can be taken out tax-free if you keep the funds in there until age 59 1/2 or 5 years, whichever is later.  This is a good thing.  Start a Roth at a young age if you can.

One of the most important and unique features of the Roth is that you can access your contributions, any time, with no taxes or penalty.  Keep in mind that the money you put in was after-tax – you have already paid taxes on it.  So, the government does allow you to withdraw your contributions – no questions asked. Some people think this is a drawback to the Roth, but I think it is a good feature. And this is how you could use a Roth for both college and retirement savings.

As you save money for your retirement, or your future, in your Roth, and your child or children get older and closer to college, you could end up using your contributions to help pay for college expenses!  For example, let’s say for 18 years you put in $4,000 a year in your Roth and it has grown, with interest and earnings, to $139,000.  You could take out any amount up to the $72,000 with no penalty!

In this example, you would still have the interest in your account to be used in the future.  Also, if both spouses put in $4,000 a year for 18 years, then they would have a total of $144,000 to access for their children.  Got it?  Not bad.

With this approach you have flexibility and some discretion over what you want to do based upon how your life unfolds and how your needs and your values might change over the years.  It is a given that we all experience change and unexpected circumstances and having flexibility in your investments can help you better address your financial needs in the future.  While I generally believe it is better to save for your retirement than for college if you have to save for one or the other, this flexible investment could help you with both goals.

One other note is that the Roth can also work for people that have children later in life.  If you need to withdraw from your Roth IRA after 59 1/2 and the account has been open for more than 5 years, the withdrawal is tax-free.  It can be used for anything at that point.

By the way, I would recommend that you keep a simple spreadsheet of your contributions each year and any withdrawals that you make from your Roth. Ultimately, it is your responsibility to accurately report any distributions you take from your Roth IRA to the IRS.

What do you think?  Could this work for you?