Caveat Employer: The DOL is Coming! The DOL is Coming!
As if employers weren't already up to their elbows in rules, regulations, and expenses, the Department of Labor recently empowered itself to fine at least half of the 401k Employer/Plan Sponsors it audits… for multiple investment related reasons.
These include, among other things, the cost of the products in the investment menu and the market value performance of those products. As a plan fiduciary (right, employers are now plan fiduciaries), it’s their job to keep costs below average and performance above average…. and, yes, the government says that they are also responsible for employee investment decisions… no matter how foolish.
Hardly seems fair, does it. Generous employers give their employees money to invest along with their own, and the "feds" want them to guarantee that plan participants won't lose money... in the stock market! I thought only banks and insurance companies could guarantee investment principal. But the regulators are missing the point, and a great opportunity to actually fix what is really wrong deep inside the 401k "space". And this is it.
No one in the 401k business seems to care a lick about the retirement income benefits the plans could provide to employers and employees alike… not the DOL (anointed by ERISA to champion employee retirement income), not the product providers, not the fiduciaries, the TPAs, or the Plan Advisors. None, nobody, NADDA!
Why? Since the dawn of MPT, the investment world has shifted from a "purpose driven" view of investing to a market value performance only standard that just makes no sense at all when applied to retirement income investing. Income pays the bills. Bonds, Preferred Stocks, loans, Mortgages, etc., all pay the same income regardless of their market value. All are less liquid than common stocks and their portfolio purpose is totally different.
Without MPT (and mark to market accounting) there would have been no financial crisis. Back to the DOL and 401k plans.
Since roughly half the plans will always be below average, it’s fair to expect that large numbers of plans will be fined….
In fact, 70% of plans audited in 2013 were penalized or forced to make reimbursements. Neither ETF providers nor Mutual Fund promoters share this responsibility with employers, and all of this stress is on top of the “top heavy” problems they have to deal with year, after year, after year…
Employers can protect themselves from the fines and the “top heavy” audits in one fell swoop by switching a professionally-managed-by-a-fiduciary, self-directed 401k called a “Safe Harbor” Plan. In this type of plan, there is no menu of one size fits all, low (or no) income producing products. Employers can direct that investments support the ultimate income benefit of the program.
You see, the goal of the providers is to keep your money in their funds forever, hoping for upward only markets and their ability to convince you that you just can't do better than 2% income anywhere. That’s the 401k space “end game”, but you can do much better, and considerably safer in a… “Safe Harbor”, managed growth and income program…
In the self directed, private portfolio “space”, plan sponsors can require the safest equity selections, and growing retirement income, in a flexible asset allocation geared to the age and risk profile of each participating employee. Employees don't have to participate, but plan sponsors have to provide an immediately vested matching contribution if they do…. BUT, the top heavy problems disappear, and contribution levels have no backdated limitations.
Not so long ago, I brought a QDI (Quality, Diversification, and Income) portfolio series to the 401k space. None of the product pushers were even slightly interested in any facet of the program… not even the superior retirement income generation capabilities… the “good ‘ole boys club” just couldn't be bothered. With the stock market at the peak of a six year sustained rally, what protections do employers have from a correction?
In a MCIM managed program, equity profits have already been taken, and the income keeps growing… monthly, in most cases. The Target Date Funds that 401k providers are in love with, are low quality equity, seriously low income time bombs, ready to go… KABOOM! The Vanguard 2015 Fund, for example, is 50% invested in no less than 5,000 stocks and the total portfolio income is just barely 2%. What do you think the 2020 or 2025 portfolio look like?
Here’s a look at the internal workings of a professionally managed retirement income program: a high quality, individual security, 30% Equity portfolio, generating three times the Vanguard 2015 TDF income, with a whole lot less risk:
Hmmmm, Small Business Owners, seems to me that a "Safe Harbor" plan would resolve your fiduciary responsibility issues.