Participants: The 401(k) industry, as most investors can attest, has not been immune to the market turbulence experienced over the last decade. The “Lost Decade”, as it has been described, may seem even more severe and more lost as 401(k) investors try to determine how in the world they are going to save enough for retirement. As employees look at their 401(k) accounts do they know how to address the problem? Do they have the expertise to make proper adjustments when needed? Do they know what asset classes are appropriate for their particular risk tolerance? Do they know which asset classes are correlated, or non-correlated, to the market? And can they access those asset classes if they do? Do they get more aggressive trying to make back losses or do they try to just keep what is left? Do they turn to their employer for advice or the colleague in the cube across the hall? Where do they turn for help with what will probably be their first or second largest asset upon retirement? These questions highlight the inherent problem for participants in the 401(k) marketplace today.
A vast majority of 401(k) participants are left on their own to manage their own investments and as a result the retirement security of millions of Americans is threatened. Investors left to their own devices have not faired well. Every year DALBAR updates its industry leading study on investor behavior and every year the results are strikingly similar. Over the 20-year period ending in 2010 the S&P 500 returned an average of 9.14% annually while the average equity investor returned a meager 3.83%, slightly bettering the 20-year inflation rate of 2.57%. Why is this so? In one word: Emotion. At Iron Logic, we believe emotion can be controlled with discipline and knowledge.
Sponsors: Plan sponsors may be in a more tenuous position, especially in turbulent markets. Not only do they experience the ups and downs in their own accounts, they are tasked with meeting their fiduciary responsibilities to the plan. According to the Department of Labor these responsibilities include:
- They must act solely in the interest of plan participant and their beneficiaries and with exclusive purpose of providing benefits to them.
- They must carry out their duties prudently.
- They must follow the plan documents as long as they are consistent with ERISA (Employee Retirement Income Securities Act).
- They must diversify plan investments
- They must pay only reasonable plan expenses
With these responsibilities comes liability. To fulfill their responsibilities requires expertise in a variety of areas, such as investments. A qualified plan fiduciary that lacks this expertise will want to hire someone with that professional knowledge to carry out the investment and other functions. In a litigious society it is imperative plan sponsors limit their liability in this area when possible. How is this accomplished? How much liability can I transfer to a third party? What exactly does prudent mean? The answers to these questions can be confusing, overwhelming, and simply not in the sponsor’s area of expertise.
If you are a qualified plan sponsor or a qualified plan participant I encourage you to explore the next section entitled Our Process which lays out our thoughtful, time sensitive process for addressing these pressing questions.