In our last post here, I pointed out the importance of featuring managed portfolios, usually target date funds, in 401k line-ups as research has shown that the majority of participants lack the time and interest to select and monitor their portfolios. Cruising on autopilot, in other words.
That said, when one cruises on autopilot, they still need to occasionally check the engine, right?
So let us take a closer look at target date funds (TDFs):
The basic concept is that a participant only needs to select the date that most closely corresponds to their anticipated retirement year. The fund provider creates portfolios of stocks, bonds, cash and for some “alternative asset classes” that are risk/return appropriate based on the investors’ time horizon – and then gradually and automatically adjusts the mix as the investor moves to and through retirement. This adjustment is known as the “Glide-Path” But here is where TDFs differ and why we still need to check the engine:
When investors are more than 25 years away from their retirement age – virtually all funds allocate a high % of the portfolios to equities. However when one is AT retirement age there is a wide gap – with funds ranging from 25% equities to 60% equities – also the allocation adjustments can vary dramatically through retirement. Which approach is better is of course in the eye of the beholder (i.e., investor, adviser, participants, Et. Cetera).
The important point here is to be aware of the allocation mix and to understand the glide path approach of the provider and make sure it fits into your overall financial and retirement planning strategy.
Cruising on autopilot is a good thing for many investors, especially 401k plan participants, but it never hurts to check the engine.
Numerous studies reveal at least 80 Percent of 401k or 403b plan participants just don’t care about the nuances of investing and portfolio management. They have expressed that they don’t have the time and/or interest to create and monitor their own 401k portfolios – they just want to know they are doing the right things and they will have enough money when they are older.
These folks need access to managed solutions – globally diversified between equities, fixed income and cash. And they come in two flavors:
1) Risk Based: under this approach your participants can choose a managed portfolio of funds and/or ETFs based on risk (Conservative, moderate, aggressive etc) and it’s up to the participants to move among the risk categories as their situation warrants.
2) Glide path : Otherwise known as “target date”. With this approach, the 401k participant simply picks the year they estimate will be closest to their retirement age, and that’s it! A fund company will then manage a portfolio based on the time horizon and gradually adjust the risk mix to become more conservative as one moves to and through retirement years.
Of course some folks will want to do it themselves and adjust their portfolios which is why a plan sponsor also needs to offer “stand alone” investment choices. But it should be known that for the majority of the participants - who will rarely pay attention to the portfolio details – a managed choice is the way to go, which is why Cerulli associates projects that over 63% of all 401k contributions will go into target date funds by 2018.
So if you sponsor a qualified retirement plan or 401k, make sure to feature low cost managed account solutions – risk based and/or glide path – to provide the majority of your participants what they need to achieve long term financial security!
401k plans need financial advisors.
A plan I dealt with briefly had more than half its assets in a GIC fixed annuity. Why on earth would the participants do that? If the average participants’ age was 45 – that means they have, on average, another 40, 45 years to and through retirement – so why so much fixed income and so little growth? Is it conceivable that if that 401k plan had a trusted financial advisor the participants would have been more appropriately invested?
When I meet with 401k participants for individual consultations, I usually have enough time to share investment concepts I have learned (the hard way) over the last 27 years to influence their investment behavior in a positive way.
Sometimes, in these meetings or group discussions, I find out participants have not properly named beneficiaries on their accounts, therefore exposing their heirs to unnecessary hassles and taxes. A gentle reminder is often enough to get them to complete the beneficiary form and save problems for everyone down the line. Many participants are unaware that – in the absence of adequate corporate benefits and government entitlements – they will need to defer at least 10% of their income to have a decent chance of maintaining their lifestyle in retirement.
Many times pointing this out – perhaps with a nice power point chart – provides the needed nudge to get them to defer more. Numerous studies have revealed that 401k or 403b enrollment meetings conducted in person – rather than remotely – yield better results.
If you are a 401k or 403b plan sponsor, it may not be easier to find a financial advisor that you trust – but if you do, they will be worth their weight in gold.
This was the title of a USA today cover story published on Friday February 12th – without the (Just kidding). The article is absurd and an insult to its readers. But more important, this type of “fear mongering” with pictures of sharks circling a dollar sign is hurtful to investors that take this as advice – which I’m sure many do.
Here is the opening paragraph:
“The persistent pounding global stock markets are taking seems to be taking on a more sinister tone and more dangerous phase, with emotions and fear taking on a bigger role in the rout, investors questioning the ability of the world’s central bankers to calm the market’s frayed nerves and a volatile environment in which selling begets more selling”.
And here is the main Quote embedded in the story:
“The main fear today is that we’re in uncharted waters, with the U.S. and global economy slowing while the major central banks have interest rates at or near zero”.
Ridiculousness. If one studies history, there is absolutely nothing new here.
The article was published in the February 12th 2016 edition of USA today. And if one didn’t know the market was about to make a complete recovery from its worst start ever before reading this garbage.. you may have had a clue after reading it! And that’s because the fear mongering in the financial media is usually the worst right before it’s about to turnaround – meaning if you follow the advice of (main stream) financial media – you will usually be doing the opposite of what you should be doing.
The news and especially financial news is a short-term focused source for information – which is diametrically opposed to the truth of investing: it is long-term.
On February 9th (sitting in Jack Welch’s old office on Lexington Ave.) I was interviewed by Courtney Woolworth of Asset TV to discuss Fiduciary responsibility of 401k plan sponsors, retirement plan advisers, 401k participant education and advice and much more. For the full interview please see below.
What is an expert?
How much more is it than someone with lots of data?
And… to what end?
Burton Malkiel said that Random Walk is an “obscenity on wall street” hurled as an insult to the professionals of finance. Taken to its extreme, it means a blindfolded monkey throwing darts at the stock pages could select a portfolio that would fare as well as one selected by the experts.
So the Wall Street Journal holds a contest. Not with actual monkeys, but with staff playing the role of monkeys by throwing darts at the stock pages hung on the wall – then compared that to the picks of the pro’s. Over the course of the contest, the pros did came out ahead (whew). Investor Home reported the results of the first hundred dart contests:
Not bad for the darts, and a bit disappointing for the pros I would say. The details and relevance of this stunt let too much debate and consternation. (For example one big challenge for the pros was that the results excluded risk and dividends)
In the end I wouldn’t take Malkiel’s random walk theory to its extreme, but I wouldn’t completely discount it either. I’d certainly be dubious about hiring a stock picker as we should never look to experts for all the answers – only informed opinions at best – especially when it comes to forecasting the markets.
In February of 2012 the DOL published its final regulations on Fee disclosure for 401k retirement plans. These laws went into effect July 1st of that year and deal with disclosure of compensation for 401k retirement plans governed by ERISA. There is now a requirement that all compensation is disclosed annually – in writing. The plan provider is required to make a disclosure to the plan sponsor (employer) and the employer in turn needs to make a disclosure to its participants.
In the past, there was a common practice (or dirty little secret) in the 401k world called “revenue sharing”. Some slick folks just call it “Rev share”. It’s a practice whereby a mutual fund or insurance company makes indirect and opaque payments to third-party administrators and/or 401k retirement plan advisers. They do this by raising the expense ratio in the fund above and beyond the pure cost of fund management, then use the excess fees to provide additional compensation (i.e pay off) to the administrator and/or adviser.
This practice is still legal to the best of my knowledge but not in sync with the new laws. (It was said that Enron started down the wrong path…by employing practices that were “legal” but “sleazy”)
So a 401k solution that’s starting to gain traction is a fully transparent one. The share class of the funds used in the plan are the lowest share class available, usually called institutional shares. The expense ratios in the funds represent only the pure cost of the funds management. The fees associated with administration, record keeping and financial advice are disclosed, as line – item debits on each participant statement. Hence, the investor can see clearly who is getting paid and how much.
The 401k plan has earned a bad reputation mainly because of hidden fees. It’s still the best way to invest for retirement and will become even better as revenue sharing continues its decline and fees are communicated in a clear and straightforward manner.
While Federal Income Taxes are unchanged from 2015 – there were other tax code changes including adjustments to 401k & IRA limits, Standard deduction, Gift & Estate taxes and more.
My friends at Brokers service sent over this handy chart which covers tax changes as well as social security, IRA distribution tables and more…
I found it helpful and hope you do as well!
There’s been much talk lately about the rise of the “Robo-Advisor”. Firms like Wealthfront and Betterment apparently have attracted backers and investors. As a retail financial advisor for the past 27 years, of course this gets my attention. Will I be replaced by a robot and forced to find a new day job? My best guess is that there may be a place for Robo advisors in the future – and they will probably press traditional advisors to get better and perhaps lower fees – But I doubt they will kill the human advisor. T.V. changed radio but didn’t kill it, correct? Here are 3 things Robo Advisors can’t do:
1) Provide Faith: Not to get too deep about his, but when markets correct it can be sudden, severe and upsetting. As industry speaker Nick Murray puts it – in a bear market you can throw out the charts and it becomes a contest of “Faith vs. Fear”. Many investors are scared their portfolio will go down and never recover. The main service the advisor offers at this time is Faith. The advisor (hopefully) has more experience than the investor and a broader understanding of dividends, earnings and the history of the markets so can provide a certain amount of Faith that the long term plan will most likely work out in the end. This type of faith can only be conveyed in person. It can’t be provided by a screen or tablet, believe me.
2) Offer Comprehensive advice: The robo advisor is narrow-minded, only focusing on securities: stocks bonds & cash. A good advisor today is comprehensive and has a broad understanding of the clients’ total picture including, Risk, Taxes, Insurance, et. cetera. To illustrate – it often makes sense to annuitize part of ones portfolio at retirement – but the Robo can’t see that because they don’t comprehend risk solutions. They also can’t see if the client needs more life or long term care insurance, Right?
3) Develop a relationship: Sometimes it feels like a computer has a mind of its own… but you still can’t develop a relationship with one like you can with a fellow human. Sure we’ll buy pots, pans and socks on Amazon – but financial advice is much different. It’s an invisible service, very complex and visceral. Like an accountant or estate lawyer – folks with assets or income to speak of need a relationship – which you can’t get from a Robo Advisor.
We all own equities. Even if you’re not “In the Market” you get up in the morning and wash your face with soap (hopefully). Perhaps you bought that bar of soap from one of the leading soap makers? (Colgate Palmolive founded by William Colgate in 1806/ticker symbol CC).
We put on our sneakers – for many of us they are NIKE (ticker symbol NKE).
Then you get in your car and drive to work. Maybe it’s a Ford? (Founded by Henry Ford, revolutionizing transportation in 1806/ticker symbol F) – or a Toyota? (ticker symbol TM).
We can go on and on with this. If you live in America – or any developed nation – you are wholly intertwined with public equities every day regardless of your 401k allocation. Like it or not, you are invested in public companies, run by ordinary people, cranking out products you use to live on a daily basis, while trying to turn a profit.
For 27 years as a financial advisor and planner, I have heard time and time again why people don’t want to invest in the “Market”… because they don’t trust the system or they are “bearish” or “pessimistic about the future”. What they are really saying is they don’t trust people and they don’t trust the lives they are living every day.
So they keep their money in CD’s earning 2% while the bank invests for them earning 5% or 6% and the bank keeps the difference and they feel safer because they “didn’t invest”.
If you are considering investing in public equities, you may want to maintain a proper perspective and time horizon. Consider this chart – courtesy of Returns 2.0
But in the end remember that if you don’t own public equities, you are still investing…. when you wash your face, put on your sneakers and drive your car.. you’re just missing out on long term appreciation and dividends.