Cobb Retirement Solutions, LLC

Excess Contributions and Excess Aggregate Contributions

Fri, 01 Feb 2008 20:31:47 GMT

Excess Contributions and Excess Aggregate Contributions
Start Date: 31-Dec-08 8:30 AM
End Time: 31-Dec-08 5:30 PM
Speaker:

Event Details:

Must be returned by December 31 (or by the end of the plan year for non-calendar year plans) in order to avoid a disqualifying event.

Required Minimum Distributions (RMD)

Fri, 01 Feb 2008 20:34:01 GMT

Required Minimum Distributions (RMD)
Start Date: 31-Dec-08 8:30 AM
End Time: 31-Dec-08 5:30 PM
Speaker:

Event Details:

Non-5% owners must begin to receive payments by April 1 of the calendar year following the later of the calendar year in which the employee reaches age 70 ½, or the calendar year the employee retires. Participants age 70 ½ who are 5% owners must begin to receive payments by April 1 of the calendar year following the year in which the employee reaches age 70 ½. Payments subsequent to the initial payment must be made by December 31 each year thereafter.

SAR Extended Due Date

Fri, 01 Feb 2008 20:28:06 GMT

SAR Extended Due Date
Start Date: 15-Dec-08 8:30 AM
End Time: 15-Dec-08 5:30 PM
Speaker:

Event Details:

December 15 for a plan that filed Form 5558 for an extension to October 15 for Form 5500.

SAR for companies with Filing Extensions

Fri, 01 Feb 2008 20:25:25 GMT

SAR for companies with Filing Extensions
Start Date: 15-Nov-08 8:30 AM
End Time: 15-Nov-08 5:30 PM
Speaker:

Event Details:

November 15 is the last day to provide the Summary Annual Report for the previous year if the company sponsoring the plan received an extension for filing federal corporate income tax. A summary annual report must be automatically distributed to plan participants within two months after the filing date for Form 5500. November 15 marks two months after the Form 5500 automatic due date extension to September 15.

Form 5500 Extension Due

Fri, 01 Feb 2008 19:10:57 GMT

Form 5500 Extension Due
Start Date: 15-Oct-08 8:30 AM
End Time: 15-Oct-08 5:30 PM
Speaker:

Event Details:

October 15 is the deadline for the Form 5500 if a 2 ½ month extension (Form 5558) with July 31 as the original deadline has been granted.

PBGC Form 1 EZ-Annual Premium Payment

Fri, 01 Feb 2008 19:35:29 GMT

PBGC Form 1 EZ-Annual Premium Payment
Start Date: 15-Oct-08 8:30 AM
End Time: 15-Oct-08 5:30 PM
Speaker:

Event Details:

By the15th day of the ninth full calendar month n which the plan year began, Plan Sponsors must prepare file this form.

Summary Annual Report

Fri, 01 Feb 2008 19:09:13 GMT

Summary Annual Report
Start Date: 30-Sep-08 8:30 AM
End Time: 30-Sep-08 5:30 PM
Speaker:

Event Details:

A summary annual report must be automatically distributed to plan participants within two months after the filing date for Form 5500 or 9 months from plan year end. The SAR is a simplified summary of the full Form 5500.

Tax Deductible Contribution Last Date

Fri, 01 Feb 2008 19:07:06 GMT

Tax Deductible Contribution Last Date
Start Date: 15-Sep-08 8:30 AM
End Time: 15-Sep-08 5:30 PM
Speaker:

Event Details:

September 15 is the last extended deadline available for employers to file their corporate tax return (and make deductible contributions to the plan).

What is a Stable Value Fund?

noemail@cobb-retirement.com — Tue, 02 Sep 2008 14:00:00 GMT

For a downloadable version of this article click the link below:

What is a Stable Value Fund?

If you’re a participant in a 401(k) plan there’s a better than average chance that you have the option of investing in a stable value fund. There’s an equally likely chance that you don’t know what a stable value fund is.

In education meetings they are typically described as something "close to a money market fund." Let’s take that statement at face value and look at some of the specifics:

Money market funds are invested in short term, high quality, highly liquid investments such as certificates of deposit and t-bills (and have an average maturity that is typically 90 days or less). Stable value funds are invested in a range of intermediate bonds as well as the general accounts of insurance companies (with average maturities of up to five years).
Money market funds, as short term investments, are immediately impacted by changes in interest rates (you may recall that not too long ago it was very possible to receive a rate of 4 – 5% on a money market fund; that same fund as of September, 2008 probably pays more in the range of 2%). Stable value funds purchase insurance "wrap" contracts and credit today’s rate based on a blend of past and present interest rates.
Money market funds are typically offered to the general public as well as retirement plans. Money market funds are mutual funds and, as registered products, can be purchased in any type of account. Stable value funds are not mutual funds. Stable value funds are collective investment trust products offered only within qualified retirement plans (like a 401(k)).
Money market funds and stable value funds may both invest in bonds offered by the U.S. government, but neither type of investment offers a guarantee of principal (there are a few exceptions to this rule on the money market side of the equation).

In short, stable value and money market funds have more differences than similarities. These differences do not necessarily make one better than the other but it is fair to say that the average stable value fund should credit a higher rate of interest than the average money market fund over the long haul.

That said: neither of these investment types is designed to significantly outperform inflation. To put it another way, they are both parking spots for your money that offer less risk and significantly less return than the other options within your menu.

As always, please make sure that you read up on all of the specifics of any investment before you buy it.

Marshall J. Cobb, CRSP, is president and founder of Cobb Retirement Solutions, LLC., an independent, fee-only firm offering qualified plan analysis and oversight exclusively to corporations and organizations. Cobb’s first-hand knowledge as a veteran representative of retirement plan vendors beginning in 1990 gives him a unique perspective as he advises his clients. Cobb runs his office -- based in Houston, Texas -- with employees and clients across the country.

2-Sep-08 9:00 AM

Don't Overlook Your Beneficiary Form

noemail@cobb-retirement.com — Tue, 02 Sep 2008 14:00:00 GMT

For a downloadable version of this article click the link below:

Don't Overlook Your Beneficiary Form

You love your dog. Your dog loves you. In the unfortunate and unlikely event that your dog should outlive you; you may wish to leave money behind to care for him -- a noble sentiment for your noble, four-legged survivor.

While you can arrange this though your will and a trust account please don’t try it with the beneficiary form for your 401(k). Rover won’t receive a check for the remaining balance in your account for a variety of reasons, including the fact that he can’t sign the back -- nor does he have a bank account. Lastly, as a few comedians have pointed out, Rover doesn’t have any pockets so where would he put the money?

This same logic applies when a minor is designated as the beneficiary. My two-year old is more likely to eat a check than sign it and a diaper is a time bomb when used as a wallet.

So, we’ve ruled out dogs, cats, parakeets and minor children as "people" that can be listed on your beneficiary form. Who can you list? Adults. The exact age of majority (a fancy way of saying "adult") varies by state but is typically as young as 18 or as old as 21.

Incidentally, if you’re married your spouse must be listed as your primary beneficiary unless he or she has signed away those rights in the presence of a notary. How you would broach that topic with your spouse is up to you. Good luck with that conversation.

To further confirm, "married" means not legally divorced. Once upon a time you said "I do" and while your feelings may have changed simply saying "I don’t" doesn’t actually change anything. Until a divorce is legally finalized you are still legally married and, unless your spouse waives their rights, they will receive the proceeds of your account even if you remove them from your beneficiary form.

Those of you who have children from a prior marriage may want to take particular care with the beneficiary designation process as your new spouse’s interests may not align with those of your children.

If you’re not married you can name any adult you desire as your beneficiary. For that matter, you can name several adults and have the proceeds split between them. There are further nuances to this approach. For example, a per stirpes designation between two beneficiaries means that if one beneficiary dies the proceeds will pass to their heirs.

Once you’ve settled on your selection for your primary beneficiary (or beneficiaries) you should also name at least one contingent beneficiary. The contingent beneficiary will receive the proceeds of your account if your primary beneficiary is not alive to receive it. If you’re married – in which case it’s likely that your spouse is the primary beneficiary – it’s critical that you name a contingent beneficiary as an accident could result in the death of both you and your spouse. Morbid -- but true.

Remember, the same rules apply to contingent beneficiaries: no dogs, no cats and no minor children.

I mentioned wills earlier. While it’s not a fun topic, it’s a very good idea to have one. If you have children it’s a necessity. A properly executed will dictates not only the distribution of your assets but also the guardian of your children. If you and your spouse die without a will your assets and your children won’t vanish. Instead, you will have triggered the probate process. Ultimately your assets and heirs will be addressed through probate but you have then invited increased delay, increased costs and the possibility that your wishes will not be carried out after your death.

Lastly, a will can allow you to set up a trust as the recipient of your 401(k) account. It will also allow you to consider all of the potential options related to your beneficiary designation – a little more complicated than you might have initially thought? Don’t forget about Rover…

2-Sep-08 9:00 AM

401(k) Fee Disclosure and the DOL

noemail@cobb-retirement.com — Thu, 31 Jul 2008 19:00:00 GMT

For a downloadable version click the link below:

401(k) Fee Disclosure and the DOL

Members of Congress, the Securities Exchange Commission (SEC) and the Department of Labor (DOL) have spent the past several years in on-again/off-again discussions regarding fees within 401(k) plans. The upshot of the debate is that requiring employers to document the fees charged against participant accounts might result in reduced costs for participants. How? Apparently all involved are hoping that shame will do the trick as no one is contemplating caps on fees. Employers must be gouging employees or why else would there be such a fuss – or so the logic goes.

Substantial legislative change in an election year is harder to find than $3 gas, and this year has not proven to be an exception. With Congress sidelined, the DOL has finally taken action in the form of a proposed regulation requiring uniform fee disclosure. This effort has been lauded in a number of publications that have leapt on the shame bandwagon and are now touting the significant savings that will soon be a reality.

While I am always in favor of complete disclosure, I have some problems with the path the DOL is taking. The primary issue is that, based on the proposed regs, most participants will receive a disclosure saying that they pay nothing in administrative costs. In reality that participant, along with all of the other participants, is paying 100% of the administrative costs of the Plan.

How can this be? I wasn’t in the meeting but a funny thing must have happened on the way to the proposed regs as the DOL conveniently forgot to include any disclosure requirement for “soft dollar” revenue -- money the funds within a 401(k) plan pay back to the vendor servicing the plan in exchange for being included in the menu.

A full explanation of this practice can be found in previous articles (please see Revenue Sharing Part I, II, III) but for our purposes here, let’s say that the operating expense of a given fund – which is required to be disclosed under the proposed regs -- is 1.00%. This 1.00% is what all participants within the plan pay to utilize the fund (this information is already available through another wonderfully complicated disclosure document: the prospectus).

The “soft dollar” revenue aspect of this arrangement is that the fund manager will pass (for example) half of the fees generated by the operating expense (.50%) back to the recordkeeper. If $1 million in plan assets is invested in this fund, the recordkeeper is receiving $5,000 a year back from the fund on an annual basis ($1,000,000 x .50%). Repeat this exercise for all of the funds within a 401(k) menu and its easy to see why there isn’t an additional administrative fee charged to participants. The vendors are making all they need to provide administrative services for the plan from the soft dollar revenue.

While this may be news to you, soft dollar revenue sharing is not a secret. It’s the cornerstone of the 401(k) industry and congress, the SEC and the DOL are well aware of it. It’s also the main driver for what funds are available in your 401(k) plan, and how much they cost.

The question then becomes: why would the DOL propose a disclosure requirement that ignores soft dollar revenue sharing? It’s a great question; one that I’m sure the mutual fund and 401(k) recordkeeping industry has already discussed at length with the DOL.

Getting back to the employers for a minute: there are assuredly employers out there who levy excess fees on their participants to reduce the check they would otherwise have to write to offer the 401(k) plan. That said, many (most) employers unwittingly participate in the soft dollar revenue arrangements because those arrangements were imbedded in all of the proposals they received from every vendor willing to provide administrative services. Many employers, by the way, do write six or seven figure checks to support their plans when they fund their matching contributions.

If shame exists in this situation, it falls primarily in the lap of the mutual fund and recordkeeping industry – perhaps with a bit to spare for the DOL. That said, if the proposed version of this disclosure becomes reality, none of those parties will have to worry as those expenses apparently don’t count.

Marshall J. Cobb, CRSP, is president and founder of Cobb Retirement Solutions, LLC., an independent, fee-only firm offering qualified plan analysis and oversight exclusively to corporations and organizations. Cobb’s first-hand knowledge as a veteran representative of retirement plan vendors beginning in 1990 gives him a unique perspective as he advises his clients. Cobb runs his virtual office -- based near Houston, Texas -- with employees and clients across the country.

31-Jul-08 2:00 PM

Paralysis Through Info-Overload With No Analysis

noemail@cobb-retirement.com — Thu, 03 Jul 2008 17:00:00 GMT

For a downloadable version of this article click the link below.

Paralysis Through Info-Overload With No Analysis

Is the average American ready for retirement?

Between CNBC, Mad Money, Bloomberg, the Fox Business Channel and instant access to a litany of financial publications and websites, it is easy to think that people have all of the tools and resources necessary to be an informed investor. Tools, however, are useful only when preceded by training. Similarly, the ability to access nearly unlimited resources is a wonderful gift but, much like a visit to the main branch of the library, it’s not particularly useful without an understanding of the rules that organize it (and the reason I bring gifts for the librarians when I visit).

To back this up, let’s look at a couple of recent studies. First, AARP Financial’s “MoneySmarts” recent survey published in April of this year showed that over 40% of those surveyed said that “information from financial companies is not helpful and even more (73%) said that financial services professionals use more jargon than car mechanics.” The survey also found that “More than half of those surveyed (54%) said they do not read financial literature because ‘it's too hard to understand.’ When asked to compare various communications, 82% said their car insurance policy is easier to understand than a mutual fund prospectus.” Having never understood my car insurance policy, I found this to be a particularly disturbing statistic.

It probably doesn’t help that much of what is packaged and presented as information is simply entertainment – in fact, many so-called investment shows contain disclaimers at either end of their programming that says, in so many words, don’t take our advice as it’s not really advice and we’re here simply to entertain you (they hope).

We’ve seen the morbid statistics regarding the financial literacy of the general public and recently decided to conduct our own survey to see if the general platitudes – including those espoused above – are really the status quo. Sadly, when we recently asked a group of approximately 600 employees some basic questions regarding investing we found the following: 20% of those surveyed feel that stocks are guaranteed while an even larger number,59%, feel confident that bonds are guaranteed. 51% feel that investing in bonds during a rising interest rate environment is a wise decision. For the record, it’s not.

There is no shame involved when an “average” American can not successfully answer a financial quiz. At least, no more shame than should be felt when a financial expert can not install a new outlet in their home, give their car a tune-up or bake a soufflé. Mountains of readily available material exist on all of these fronts yet no one is advocating that the average American take over these responsibilities (my wiring is not for the weak-at-heart and my soufflés, much like my two-year-old, rise unexpectedly and often with great emotion). Perhaps a more intensive effort at marketing the do-it-yourself attitude on these fronts would even the playing field. HGTV is doing it’s best….

So what do we do?

No one will be surprised to hear that the government has tried to step in and help. No one should be surprised to hear that these efforts have largely failed. Consider the government’s foremost education and disclosure document: the prospectus. It may have had noble inspirations but the prospectus has evolved into a lengthy, unruly document written by lawyers for regulators. Do you own a mutual fund? Whether you realize it or not at some point you probably signed a document saying that you read and understood the prospectus. If you can honestly say that you read, and understood, the prospectus for your fund you are breathing-in rare, uncrowded air.

In partial recognition of the fact that the prospectus has failed to live up to its purpose, lawmakers have espoused and enacted a number of different strategies aimed at providing a fix. Most recently this has taken the form of target date funds, qualified default investment options (QDIA), auto enrollment and the auto-everything approach to retirement planning.

All of these changes are predicated on the idea – the evidence – that the average investor does not save enough and does a poor job of managing the small amount that is saved. Interestingly, many members of Congress who backed these changes (and therefore the idea that people are ill-equipped to handle their own investing) also backed the idea of privatizing social security, thereby allowing individuals to manage their funds within the system. It’s no wonder that the average American is confused.

Our suggestion?

We have a few high-level suggestions for our governing bodies:

1. Add mandatory components to the secondary education curriculum covering budgeting,

basic investing and asset allocation. We expect students to be able to find Delaware on

map – perhaps we could spare a little time teaching them how to balance a checkbook. No

offense to Delaware intended.
2. Shift the focus (and required disclosure) away from investment performance and instead

focus on income replacement and long-term financial health. We have a seemingly never-

ending barrage of limitations on how fund performance can be advertised, but the public

continues to rush in over the last hot issue – only to sell it at a loss for the next hot issue.
3. Recognize that the vast majority of the adult population in this country does not understand

basic investment terminology – and alter communications accordingly. Perhaps the \

government should look to hire some of the outstanding marketing executives behind many

of the largest investment firms as their branding campaigns strike deeply on the psyche

of the public.

We have a few more specific suggestions for individuals:

- Check to see if your last name is Buffett. No? Perhaps then it’s better to revamp your

performance expectations to something at, perhaps a little below, the average returns of the

market. I know that 15% a year sounds obtainable. Over the long haul, it’s not.
- Recognize that contributing three or four percent a year to your 401(k) will not, in almost any

circumstance, produce enough income for you to comfortably retire (unless you actually

manage to consistently earn in excess of that 15% figure).
- Admit that you probably don’t manage money for a living, and take comfort from the fact that

the majority of those that do fail to beat the market returns over the long haul.
- Start simple, sit down and realistically create a budget to see where you spend your money

right now then work on determining a budget (Within Excel, type “budgeting” in the

Excel Help menu, and several templates are offered)
- Look to the resources in your own back yard to assist with budgeting and financial planning

education:
- Contact The US Financial Literacy and Education Commission at 1-888-MyMoney or visit

them online at www.mymoney.gov.
- Contact your local bank and see if they participate or offer programs such as the FDIC

“Money Smart Adult Financial Education Curriculum.
- Check out the tools, articles and forums on the AARP website. You don’t have to be retired

to benefit from the information available; you can visit them online at
www.aarp.org/money/ or through the state offices which can be found at

www.aarp.org/states/ and sign up for newsletter and events.
- Look to your local community college, who likely offers low-cost courses on budgeting and

finance.
- Contact your local Women’s Resource Center and sign up for one of the regularly scheduled

education seminars on budgeting, credit planning, or retirement and investment planning.

Finally, get comfortable with the fact that you will probably watch thousands of hours of TV in your lifetime and consider whether or not your favorite show’s ratings will significantly suffer if you instead occasionally devote some of that time to bettering your understanding of investing (Cramer will still be mad the next time you tune in. Promise).

Marshall J. Cobb, CRSP, is president and founder of Cobb Retirement Solutions, LLC., an independent, fee-only firm offering qualified plan analysis and oversight exclusively to corporations and organizations. Cobb’s first-hand knowledge as a veteran representative of retirement plan vendors beginning in 1990 gives him a unique perspective as he advises his clients. Cobb runs his virtual office -- based in Houston, Texas -- with employees and clients across the country.

3-Jul-08 12:00 PM

2008 IRA Contribution Eligibility

noemail@cobb-retirement.com — Fri, 06 Jun 2008 19:00:00 GMT

For a downloadable version click the link below:
2008 IRA Contribution Eligibility

In your life you have probably met someone who said they couldn’t make an IRA contribution because they made too much money. You may even be that person.

Congratulations and potentially a dose of humility may be in order. Additionally, unless we’re talking about Roth IRAs, we’re going to need a correction -- regular IRAs are always available for those with earned income.

What may lead many to think that they can’t make a contribution is the fact that there are significant limits regarding who can deduct an IRA contribution. The impact of the rules governing these limits is shown on the chart on the next page. In the meantime, you can keep track of the elements that might keep you from deducting some or all of that contribution by remembering the three basic questions that decide your fate:

1. Do you have a job?
2. Are you married?
3. How much do you make?

I don’t suggest that you get in the habit of asking these questions of others. The IRS has no shame however, and likes to see actual proof on all these points before it potentially grants a deduction. Why your marital status, income or employment should factor in on a deduction that, at most, covers $5,000 of income is a good question for your Congressman.
So, we’re all good on this topic now. You can always make a contribution to an IRA – you just might not be able to deduct it.

I wish it were that easy but one further, significant point needs to be made: contributions to a Roth IRA are NOT always available. In the case of the Roth the biggest factor is how much money you make. If you’re married, filing jointly and make more than $169,000 (combined) this year then congratulations are indeed in order. Perhaps you should use some of that income to make a nondeductible IRA contribution as you won’t be able to put a dime into a Roth IRA.

Below is a chart which displays the contribution and deduction limits for both Traditional and Roth IRAs. The chart is broken into two parts: 1) limits for employees participating in their employer sponsored retirement plan, and 2) limits for those not participating in an employer sponsored retirement plan.

Traditional IRA
Allows participants to make tax deferred contributions up to $5,000 in 2008($6,000 for individuals 50 years or older) meaning you are able to deduct your contributions from your income taxes lowering your AGI. Contributions grow tax deferred. Withdrawals are taxed as ordinary income according to your tax bracket in the year the distribution occurs. Early withdrawals penalties may apply.

Roth IRA
Allows participants to make after tax contributions (same contribution limits as Traditional IRA). You are NOT able to deduct your contributions from your current income taxes. However, your contributions grow tax free and maybe withdrawn at retirement with no taxes due. Early withdrawals penalties may apply.

Adjusted Gross Income (AGI)
Adjusted gross income is the figure on which individuals calculate their federal taxes. It is computed by subtracting deductions, such as certain IRA contributions, from a taxpayer's gross income. It is an individual's or couple's income before itemized deductions and exclusions.

Active Participant (Retirement plan participant)
In the case of a profit sharing, 401(k) plans, or 403(b) plans, an individual is considered to be an "active participant" if a contribution has been made by the employee or employer the year in question. In the case of a defined benefit plan, an individual is an "active participant" if he/she is eligible to participate, regardless of whether any contribution is actually made.

Joint Filing

You and your spouse file joint tax return.

2008 Contribution Limits
Traditional and Roth IRA $5000, additional $1,000 catch up for participants 50 years or older.

Modified Adjusted Gross Income (MAGI)
To arrive at your modified AGI, start with your adjusted gross income and then add back the following items:
- Any deduction you claimed for a regular contribution to a traditional

IRA
- Any deduction you claim for student loan interest or qualified tuition

and related expenses.
- Any income you excluded because of the foreign earned income

       exclusion.
     - Any exclusion or deduction you claimed for foreign housing.
     - Any interest income from series EE bonds that you were able to

       exclude because you paid qualified higher education expenses.
     - Any employer-paid adoption expense you excluded.
     - Any amount claimed as domestic production activities deduction.

Note that you are not required to add back any contribution you made to an employer plan such as a 401k plan. If you are running up against the limit for modified AGI, one way to reduce that number is to make deductible contributions to an employer plan.

**Please note that CRS does not provide tax/legal advice. Please consult a qualified tax or legal resource.**

6-Jun-08 2:00 PM

Fiduciary Breaches or Just Business as Usual?

noemail@cobb-retirement.com — Tue, 03 Jun 2008 19:00:00 GMT

For a downloadable version click the link below:

Fiduciary Breaches or Just Business as Usual?

Over the past year a number of large financial institutions have been sued by their own employees for purported fiduciary breaches. The crux of these class action suits, which have been followed closely by the media, is that these large financial firms have nearly every aspect of their own 401(k) plan managed by subsidiaries and affiliates of that same firm. In short: they are managing the plan for the benefit of the firm versus the benefit of their employees. I applaud the sentiment, but the never-been-to-law-school-lawyer-in-me doubts that much will come of it in the legal sense.

On the surface it seems obvious: plan fiduciaries are charged to act in the best interest of the plan and it’s just not possible that the best solution for every need comes from an internal source. This lofty standard is often bandied about whenever pension or 401(k) plans are discussed yet in real life this standard is often at half-mast.

Let’s take, for example, the various mutual fund complexes that offer the investments used within our nation’s 401(k) plans. Do we actually believe that the management company behind the mutual fund company really thinks that the proprietary advisory firm (a sister firm supposedly separate and distinct from the management firm) is the best possible manager for the firm’s funds? You may not have noticed, but dig in to the prospectus or statement of additional information that you’re supposed to read before investing a fund and you’ll typically see that the XYZ Management Company has retained XYZ Advisors to manage the XYZ Fund. Coincidence?

This is a regulatory dance intended to protect investors but, like the fiduciary standard, it doesn’t seem to work in the real world. No matter how lousy XYZ Advisors performs it somehow manages to keep its contract in place with XYZ Management. This is in direct conflict with the fact that XYZ Management is supposed to act in the best interests of its shareholders by finding and retaining the best available investment advisors.

So, with that type of arrangement as the investment backbone of the 401(k) industry, do we honestly expect that these same investment firms, many of which also offer recordkeeping services for 401(k) plans, will actually go outside the firm for funds or services and potentially reduce their profits?

When I worked at one of these large investment management firms I routinely sent e-mails to the Trustees of our firm’s 401(k) plan asking them when they were going to allow investments that didn’t bear the firm’s name. They had some respectable offerings in their proprietary fund lineup. They also had some truly lousy funds. I was notified by the Trustees, who were also officers of the Management firm, that my feedback wasn’t needed, or appreciated.

These Trustees were the named fiduciaries of our plan, yet, in direct opposition to their role as fiduciaries, they were clearly putting the interests of the firm above those of the plan and its participants. So, besides giving me a great deal of encouragement to one day run my own firm (thanks are in order), this experience taught me early-on that fiduciaries can put self-interest above the interests of the plan participants with no apparent consequence.

Many of the apparent conflicts are centered around the system of revenue sharing which permeates the entire 401(k) marketplace (Click for more information on Revenue Sharing) Whether they realize it or not (vendors have excellent powers of persuasion in this area) employers routinely pick a more expensive share class of a fund over another available version for their firm’s 401(k) plan. The sole reason for this decision is that the more expensive share class provides more soft dollar revenue for the vendor running the plan. This means that the participants in the plan, including these officers, will pay more each year in investment management fees so that the firm can write a smaller check for plan administration. The fund itself is exactly the same, it just costs more.

This again would appear to be a direct breach of fiduciary duty. The fiduciary of the plan, who happens to be an officer of the company, is picking a more expensive version of an investment to the exclusive benefit of the firm. The fiduciary can often, with good reason, claim they had no idea that this was even occurring as the vendor may not make them aware of the cheaper share classes. Ignorance, however, does not alleviate the responsibility charged to fiduciaries to act in the best interest of the plan. Where are the lawsuits and alarms?

To date: several of the lumbering class action suits have already been dismissed. Congress, the DOL and the SEC have begun to bang their respective drums for more disclosure regarding revenue sharing – without questioning the validity of the process and the inherent conflicts-of-interest at play.

Incremental progress may well occur regarding disclosure, but this disclosure may prove to be as effective as the current disclosure document utilized in the mutual fund industry: the prospectus. Barring a cataclysmic shift in the industry where employers are not allowed to benefit from revenue sharing, I don’t see significant change on the horizon. I hate to say it, but I’m not quite sure how this would work as a practical matter.

What would happen if we were to tighten the fiduciary standards to the lofty level that we envision them? Would every employer be required to provide the best performing, lowest cost fund available at the given moment? Would some employers stop offering plans altogether if they were forced to actually pay the full administrative costs? What would happen when a generally decent fund underperformed for a year, or two? Would we all end up using the same funds? What if another investment firm came out with an identical fund that cost .01% less than the existing standard bearer?

I’m not sure that lawsuits are the answer, but I hope the leaders of these large investment firms ask themselves the question: “Is this really in the best interest of the plan?” If, and when, they give an honest answer their participants will be all the better for it. Until then, I suspect we’re all stuck with the status quo.

Marshall J. Cobb, CRSP, is president and founder of Cobb Retirement Solutions, LLC., an independent, fee-only firm offering qualified plan analysis and oversight exclusively to corporations and organizations. Cobb’s first-hand knowledge as a veteran representative of retirement plan vendors beginning in 1990 gives him a unique perspective as he advises his clients. Cobb runs his office -- based in Houston, Texas -- with employees and clients across the country.

3-Jun-08 2:00 PM

A Short Menu Can Be a Mile Long to a Novice Investor

noemail@cobb-retirement.com — Tue, 03 Jun 2008 18:00:00 GMT

For a downloadable version click the link below:

A Short Menu Can Be a Mile Long to a Novice Investor

One of my most common phone calls with a new employee typically goes something like this:

“Hello?”

“Yes, my name is Bob and I just started at Company ABC. The human resources person told me that you could help me with questions about the 401(k).”

“Yes, Bob, that’s right. How can I help?”

Big sigh. “I don’t know.”

“That’s going to make it tough Bob. Can you give me hint? Do you have the enrollment paperwork?”

“Yes. I actually got it several weeks ago but I got frustrated. Then I got busy.”

“Well, how far did you get on the form before you had a problem?”

“I completed my name and address. I also chose to defer 6% so I can get the full employer match.”

“We can talk about whether 6% is the right amount once we get your other problems straightened out. Where did you get stuck?”

“The second page.”

“Ah, the list of funds available in your plan.”

“It’s a long list.”

Typing on my end. “I just pulled it up on my pc. Yes, 22 funds is a lot to choose from. How much do you know about investing?”

“Not much.”

“Do you know the difference between a stock and a bond?”

“Sure.”

“Just so we’re on the same page, go ahead and tell me.”

Pause.

“Maybe I’m not sure. Can you tell me?”

“Absolutely. We’ll start from scratch and by the end you’ll understand the differences between all of the funds.”

“I thought you said they were stocks and bonds.”

“We’re getting a little ahead of ourselves. The short answer is that all of the things listed on your enrollment form are actually funds that buy different stocks and bonds. 17 of the funds buy primarily stocks, the rest are bond funds, a money market fund and some special funds designed around when you might retire.”

“There are 17 different stock funds?”

It may sound humorous in this format, but for the participants I speak to, it’s a source of great frustration. So much so that it deters some individuals from participating altogether.

For the novice investor, which is where most employees fall, there are several difficult questions that have to be answered. Should I participate? If I do, how much can I afford to save? Where does my money go? How do I pick the funds that are going to perform the best for my retirement? How do I pick investments and still sleep at night?

The “auto-everything” approach I’ve previously mentioned does an excellent job of handling this problem by applying default answers to every question. Again, there are many reasons why employers would avoid this approach. There are also employers who choose to apply the auto-everything solution only to new employees. How can these initial barriers be overcome when auto-enrollment isn’t utilized?

As always, I would encourage you to study your own payroll data and identify your own goals – and your budget. Here is one example of how an employer tackled this issue for their Plan:

Tiered Enrollment

Instead of a laundry list, try presenting the investments as five different concepts (this assumes that all funds/programs listed below are available through your vendor and in your plan, if all are not available, use the tiers that are). An overview piece helps employees identify the “Tier” that best describes them and their needs. Once they make their “Tier” selection, they are guided to the straight-forward enrollment materials tailored to help them execute that decision.

• Tier 1 - lifecycle or target date funds – a single fund solution for the novice investor or those that would prefer to avoid making decisions about individual funds.
• Tier 2 – the core investment menu covering the major asset classes for those who prefer some level of structure
• Tier 3 - managed account service - for employees who prefer to turn over the investment decisions to a third party.
• Tier 4 – a self directed brokerage account for the ultimate ‘do-it-yourselfer’ who wants more choice
• Tier 5 – guaranteed income option - for individuals who are wary about investment fluctuation and want at least some portion of their funds securing a guaranteed stream of lifetime income.

Participants under this structure have the opportunity to pick an approach that fits their personal need and knowledge level versus staring at a list of what would otherwise be close to 30 investment options and programs. Employers who adopt this approach may also wish to make fees part of the overview discussion as the costs can vary dramatically amongst these various tiers. Each participant then understands up-front that they are paying additional fees for additional services or underlying guarantees. They also then understand that they can “dial” those costs up and down at their discretion.

Marshall J. Cobb, CRSP, is president and founder of Cobb Retirement Solutions, LLC., an independent, fee-only firm offering qualified plan analysis and oversight exclusively to corporations and organizations. Cobb’s first-hand knowledge as a veteran representative of retirement plan vendors beginning in 1990 gives him a unique perspective as he advises his clients. Cobb runs his office -- based in Houston, Texas -- with employees and clients across the country.

3-Jun-08 1:00 PM