How a $1.6 Billion 401k Plan Figured it Out

I saw a note (link might be blocked) that a $1.6 Billion 401k plan decided that revenue sharing was, among other things, not a good idea for their plan.  Duh! Was it that hard to figure out?  What took so long?  They could have read this blog in 25 seconds and realized this.  But that would have been too easy.

They interviewed six different firms over seven months and used a consulting firm with an impressive sounding name.  I am sure they generated reams of documents with analysis as well.  I would guess that many people were involved in this process and there were multiple meetings and discussions and consultations and…  I wonder how much they paid for all of this amazing advice?

It turns out that they “negotiated” lower fees on some of their fund options. Congratulations! But does a plan this size really have to negotiate hard? All sarcasm aside, I applaud them.  They ended up with a better plan which will clearly save their employees money – which is great.  But will all due respect, HAVING A GREAT PLAN IS JUST NOT THAT HARD!  I could have told them how to do it in 30 minutes.  

I know they aren’t asking,  but my suggestion would be to write a three page Investment Policy Statement (IPS) and use a bunch of index funds from Vanguard.  Make sure that the IPS is written so that most of the employees in the company can understand it – not just a bunch of suits from financial services firms. Get rid of the consultant.  Save all of this money for something else more useful.   Simplify the whole thing.  Or, as Albert Einstein said, “Everything should be made as simple as possible, but not simpler.”  


A Primer on Retirement Plan Fees

Since we work on retirement plans day in and day out, sometimes we forget that many plan sponsors don’t have a basic understanding of the fees your retirement plan should pay.  We’re sorry about that – our bad!

Unfortunately, if you are like most smaller employers, you may not know how you should be paying for fees.  Here is a quick primer on what your plan should be pay.  We break it down into three categories:

MUTUAL FUNDS.  These are the investment options in your plan.  Their fees are known as expense ratios and can range from .05% to maybe 2%.  Big range, right? (If you are using insurance accounts, stop it – get rid of them).  Bond funds are typically less than stock funds.  Index funds should be less than actively managed funds.  International funds are typically more than domestic funds.

The fund expenses are deducted from your employees’ accounts.  We think you should use mostly passive index funds from Vanguard.  If you do, the cost will probably average .12%.  This means that for each $10,000 an employee invests, they will pay $12 a year.

RECORD KEEPING.  This is the cost to run your plan.  Record keeping is the engine of your plan.  Your record keeper processes the payroll, handles distributions, generates your Form 5500, handles plan testing, provides your plan document, etc… Sometimes this is also known as TPA work.  (Some organizations have a separate TPA, but this work is generally lumped together in most cases.  We don’t think you need a separate TPA for your plan unless it is complex or weird).  Also, the plan’s trust services are typically part of a record keeper’s service.  When you add all of the record keeping fees together (except for the trust services – which should be between .05 and .10 bp), you should be able to easily calculate this as an annual fee.

This should be paid as a flat fee.  It is typically paid quarterly.  You can have your employees pay it and have it deducted from their accounts or you can choose to pay it directly.

ADVICE.  Your organization probably needs help running your retirement plan. And your employees probably need help too. The firm providing advice to your plan will help you decide the best type of plan for your company, the investments for your lineup, how to establish an Investment Committee and an Investment Policy Statement, how to educate your staff, etc..

Just as the record keeping fee, it should be a flat fee (not a percentage fee!).  It is typically paid quarterly.  You can have your employees pay it and have it deducted from their accounts or you can choose to pay it directly.

THAT’S IT!  These should be the categories of fees you pay.  Record keeping might be the most difficult to figure out, but you should be able to determine what it is with a little research and assistance.


Honesty is Such a Lonely Word

How important is candor, or an honest message, when you determine where and how to invest? The value of candor in the financial services industry came up in a recent interview with Jack Bogle, the founder of Vanguard.  Over the years he has said much, written much, and had much said about him.  The Bogle/Vanguard story is unique and compelling.

In this interview, he made a comment that I thought was profound.  It was brief and even simplistic, but it really struck me.  He was asked if the index fund had won.  As he answers the question and comments on the growth of the index fund as a successful option for all types of investors, he describes the index fund message as “…candor as a marketing strategy.”  Read the article in the link and look for the quote.

Though this is obviously true, I’ve never heard it expressed so eloquently.  The Vanguard approach to investing could not be any more honest.  Their core product, the index fund, is the market.  You get what the market delivers, less whatever it costs Vanguard to provide it.  A simple idea.  At this point in my career this is the message I want to buy and what I suggest my clients buy as well.

But how susceptible are you to the marketing stories and schemes common in financial services? Do you prefer a good story or are you willing to accept a less glamorous, honest message?  If you want your money to “work hard” for you, will the straightforward candor of Bogle and Vanguard win you over?

Unfortunately. I believe that most investors are not willing to settle for pure candor.  Vanguard has done an amazing job, but too many people want to believe in the message that someone can deliver more than the market.  In the financial services industry, too often great story telling and marketing trumps candor, and honesty truly is a lonely word.