401k/403b
optimization services for individuals and corporations
Prior to the 1970's, "defined benefit" plans
were the primary vehicle used by Americans to save for retirement. As part of an employment or union
agreement, an employer would agree to fund a retirement plan which would
pay a specific income stream to the employee on retirement based on years
of service and final salary. The corporation
was obliged to estimate the future value of retirement liabilities,
project whether plan assets would be sufficient to meet those
liabilities, and, if necessary, contribute additional assets to cover any
shortfalls. The corporate sponsor
also paid insurance to the "Pension Benefit Guarantee
Corporation" to cover a shortfall if the company entered bankruptcy.
Most government employees at the national and state level
are still covered by 'defined benefit" plans. However corporations, non-profits and
some government organizations have switched to "defined
contribution" plans a.) to shift the risk of investment shortfalls
from the employer to the employee and b.) to make retirement assets
"more portable." In the
past, employees would often forfeit accrued benefits if they left the
corporation before fully "vested" in the plan.
The US IRS code was amended in 1978 to allow employees to
invest directly in their own retirement.
Literally, 401k and 403b refer to specific sections of TITLE 26
> Subtitle A > CHAPTER 1 > Subchapter D > PART I > Subpart
A of the tax code. 401k governs
plans of for-profit corporations, 403b applies to non-profits and
educational institutions. 457b
plans are defined for government employees not covered by pensions.
Tens of millions of Americans are now responsible for
making investment decisions for their retirement. In principal, anyone can do it! In principal, anyone can also repair
the brakes on their car, perform dental surgery on their spouse, fly a
plane. In practice, most Americans
have no idea how to set up the asset allocation of their retirement plans
and live with a troubling fear that they've done it wrong. The consequences of being wrong will
unfortunately only be revealed in retirement, at which point too late to
fix.
For years, we have helped our clients rebalance their
retirement plans on an "as requested" basis. Common mistakes
include:
· Taking on too much risk - all the assets are invested in
the "hottest" fund when the client first started investing.
· Not taking enough risk - all the assets are invested in
money market and government bond funds; hence, returns are too low.
· Investing a large portion or the entire retirement plan
in company stock (the "Enron" error.)
· Not mixing in fixed income funds as the client approaches
retirement.
· Not rebalancing periodically as one asset class gains
relative to another.
401k providers have begun to address these issues by
offering "Target funds."
Each fund, generally designated 2010, 2015, 2020 etc., corresponds
to the date that a participant would expect to retire. The fund company builds a "fund of
funds" that contain a best practices mix of domestic and
international stock funds with bond and money market funds contributing a
progressively higher percentage of the fund as the target date is
approached. So a Target 2010 fund
will be a lot more conservative than a 2040 fund.
Optimization service for individuals:
At this point in time, we're rebalancing so many plans
that we've decided to promote this service as an extension of our current
offerings. To do this work
efficiently, we need access to a client's 401k service provider website
(link and login ID.) We don't want
to know our client's usual password, which opens up security issues. Instead, we ask the client to change
their password temporarily to something like "heron2010." We will then:
· access the account
· review the fund options
· make a proposal of changes to discuss with the client
· implement the agreed upon plan
· set rebalancing options if available
· provide a follow-up review and performance analysis
annually on the client's birthday
The client resets their password whenever we're not
actively reviewing their plan. The
first review is complimentary, and the ongoing annual reviews incur a
$250 fee, which is debited from the client's investment account.
Optimization service for corporations:
We have been asked on a number of occasions to help
corporations set up 401k plans or replace their current 401k
provider. The scope of this work
includes:
· Presenting the full range of 401k providers, including
the up-front and ongoing costs
· Setting up interviews between management and
representatives of these plans
· Recommending the final selection
· Working with the selected provider to set up a menu of
top-rated funds that we think adequately serve the needs of the employees
(generally 20-30 funds, plus Target funds.)
Generally, the new 401k provider will send their own
representative to train employees in the new offering (we recommend that
the client videotape these sessions for future employees.) We are of course available for
individual consultations or group consultations, should that need arise.
Our compensation for this work is strictly on a per hour
basis and is paid directly by the corporation. We do not accept "commission"
compensation from any 401k provider because we regard such revenue as a
clear conflict of interest. Our
fees for this kind of work average about $2500 for ten hours of work.
For further information, feel free to call us at (800)
99-HERON or (800) 994-3766.
