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Monday, July 21, 2014

Idea AheadIn the scheme of things, it was not that  long ago that defined benefit pension plans were the main retirement plan game in town.  But now – for better or for worse – 401(k) plans rule in the private arena.  In the age of constant evolution in technology and streamlining of processes, it can be hard to keep up with the latest and greatest in plan design.

Think about it – the final qualified default investment alternative (QDIA) rules were published not even seven years ago, but now if you don’t have lifecycle or target date funds (TDFs) in your plan and/or you haven’t considered adding them, you may be among the distinct minority of 401(k)s.  Statistics indicate that participants like these funds. Fidelity reports that nearly 1/3 of them have invested their entire account balance in a TDF.

Sure, you can rely upon a consultant or an investment advisor to help keep you up to speed on the trends in 401(k) plans, but there are legal issues to consider as well.

Brokerage Windows

Consider brokerage windows – they may be good for offering a wide range of options desirable to sophisticated investors, providing more flexibility in investment options and (possibly) the ability to further diversify a portfolio based on investment in single stocks, bonds or other securities.  Bear in mind, however,  the options offered in a brokerage window may be more expensive than core plan offerings, there is less oversight over these funds v. the core investment options, and they may be inappropriate for unsophisticated investors given the  risks present in these arrangements.  There are ways, though, to structure brokerage windows to minimize the risks they present.

The Plan Sponsor Council of America  reported in 2013 that 17.1% of plans in its survey offered a self-directed brokerage window, and that 5.6% offered a self-directed mutual fund window.

Mutual Funds

Mutual funds are still by far the most popular investment vehicle currently offered in 401(k) plans.  A study issued by the Investment Company Institute earlier this month noted that, in 2013, 63% of plan assets were held in mutual funds (38% in equity mutual funds).  Yet, the plaintiffs’  bar continue its attack on the use of mutual funds in 401(k) plans – claiming that separate or commingled accounts are the more appropriate investment vehicle to be offered in these plans.  Their argument generally stems from purported cost savings associated with these  investment vehicles; however, it fails to consider the level of comfort participants have with mutual funds – including the fact that they can open the newspaper and see how their funds are performing.

Fund Expenses

ICI also reports that the cost of investing in mutual funds has declined since the start of this century.  Between 2000 and 2013, the expense ratio in the average equity mutual fund held in a 401(k) plan decreased by 25%.  Participants and beneficiaries investing in mutual funds through 401(k) plans (as opposed to investing in the average equity mutual fund outside of 401(k) plans) is less than half the cost – 58 basis points.

While charging a “sales load” previously was rather common in funds offered in 401(k) plans, ICI now reports that 86% of 401(k) plan mutual fund assets were invested in no-load funds at the end of 2013.

Roth Features

Since introduction of the Roth plan investment option in 2006, this feature has quickly gained popularity.  The recent Fidelity report also indicates that there was a 21% increase in Roth investment features from 2009 to 2013.  A total of 42% of plans offer this feature according to that report.

“Automatic” Arrangements

While we all may have chuckled a bit upon the introduction of the ACA, QACA and EACA rules (even if solely because of the funny acronyms), the use of automatic features in plans have proven to be very popular.  Automatically enrolling participants and/or automatically increasing their deferral elections has dramatically improved levels of participation and deferral rates.  Fidelity reports that 25% of 401(k) plans now offer automatic enrollment; that figure increases to 60% when looking at large plans.

Being an ERISA plan fiduciary is hard work, particularly in the current landscape of evolving plan and investment structures – coupled with increased regulation and scrutiny.   There is no “one size fits all” approach to 401(k) plan design; however, prudence may dictate regular review of the plan’s structure and consideration of whether any changes may be desirable and appropriate for the plan’s population.

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