The Department of Labor finally implemented the Employee Retirement Income Security Act 408(b)(2) regulation on July 1 after multiple fits and starts. The overriding intent is noble - defined benefit and defined contribution pension plan providers are now required to disclose the internal costs and fees of operating 401(k) retirement plans. With this "full disclosure," a self-correction of plan pricing may occur. As fees are now clearly stated, fiduciaries and plan sponsors will compare apples to apples, and, I believe, shop for a less expensive plan. As a result, higher-cost plans will be replaced with lower-cost plans.
Whilst 408(b)(2) doesn't specifically require plan sponsors to replace their plans with the lowest fee service plans, the lure of saving money will certainly attract a greater market share. One of the unintended consequences and repercussions, which may not become evident for a few years but could have a dramatic and negative impact on 401(k) participants, is that these lower cost plans may compromise the level of service provided. As plans compete on price, services may take a backseat.
This natural progression toward less expensive plans will be occurring at a critical time. With interest rates at historic lows, and more than 10,000 baby boomers reaching retirement age every day for the next 18 years, according to Pew Research Center, an increased level of service from plan sponsors will be needed, not less.
Target-date fund effect
One of our greatest concerns for current plan participants, especially those who will soon be looking to retire, is that their plans contain target-date funds. Target-date funds are now very common in 401(k)s and as of Aug. 1, 2012 hold $380 billion of assets, according to CNN Money.
This is the default selection for many participants when plans are implemented and/or "mapped" and plans are transferred from one investment provider to another.
But if rising interest rates cause a significant move in the bond market, participants in income-heavy target-date funds may be adversely affected. The passive management of these types of investments could prove to be very detrimental to those close to retirement. A more active and tactical management approach may be more prudent to try and avoid negative market movements. The investments are now more readily available to advisers as broker-dealers continue to move toward levelized compensation. With plan providers allowing advisers to select investments rather than dictating portfolio percentages, the playing field is being leveled and the advisers can actively manage a plan based on the needs of the participants. In our opinion, active plan management by experienced investment advisers will be more important than ever.
The advisers that can position themselves as full service providers will continue to gain value in the 401(k) arena over the next few years. As the needs of the baby boomers become more obvious to companies and plan sponsors, the demand on plan providers to provide a higher level of service will increase, and that is a challenge for the 401(k) industry.
Reducing fees and lowering the service level may be the knee-jerk reaction for many companies as they comply with ERISA 408(b)(2).
AmeriFlex is forging a different path. Our focus remains not only to offer competitive fees, but also a full suite of services to 401(k) plan participants which focuses on the holistic development of their financial future. Our clients' financial goals are our top priority. In addition to financial planning, retirement income planning, and tactical asset management, we also offer long-term care and insurance services, trust services, Social Security and Medicare planning, and most recently our partnering with eMoney to offer an online platform for organizing financial accounts and important documents in one secure place (honeyigothitbyabus.com). Having been a provider of financial services for more than 24 years, we believe we are well positioned to assist our clients in achieving their goals.
I find it ironic that 408(b)(2) may actually set the bar lower and not higher in terms of protecting 401(k) participants. As plans migrate to lower fee offerings and are "mapped" for older participants landing in a default target-date fund that may be imbedded with bonds, we may have an unintended consequence as a result of 408(b)(2) damaging senior savings.
Goodson, ChFC, CLU, is the founder and chief executive of AmeriFlex. He can be reached at email@example.com, or by calling (805) 898-0893.
Tom Goodson offers securities and advisory services through SagePoint Financial Inc., member FINRA/SIPC. Insurance services offered through AmeriFlexÂ® Financial Services, which is not affiliated with SagePoint Financial, Inc.
Investing in mutual funds involves risk, including the potential loss of principal. Risks vary depending upon the strategy used by the fun as well as the sectors in which the fund invests. When redeemed, shares may be worth more or less than the original amount invested. Past performance is no guarantee of future results. Please note that individual situations can vary. Therefore, the information presented here should only be relied upon when coordinated with individual advice.
Invests in Target Date Funds are subject to the risks of their underlying funds. The year in the Fund name refers to the approximate year (the target date) when an investor in the Fund would retire and leave the work force. The Fund will gradually shift its emphasis from more aggressive investments to more conservative ones based on its target date. Investments in Target Date Funds are not guaranteed at any time, including on or after the target date.
There is no guarantee that an actively managed portfolio will outperform a passively managed portfolio in any given market environment. No investment strategy, such as an asset allocation, can guarantee a profit or protect against loss in periods of declining values.
Investors should carefully consider the investment objectives, risks, charges and expenses of mutual funds. This and other important information is contained in the prospectuses, which can be obtained by contacting (805) 898-0893 and should be read carefully before investing.
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