A. Typically, investment management fees account for 80 to 90% of total 401(k) plan costs. These fees can vary significantly from one vendor to the next and depend on services provided, such as record keeping, type of investments offered, types and frequency of reports, educational materials provided, and features such as loans, Internet trading and telephone transfers. Consider obtaining estimates from more than one service provider, but be aware that cheaper is not necessarily better. Total costs must be weighed against total value received.
The Employee Benefits Security Administration section of the Department of Labor Web site (http://www.dol.gov/libraryforms/FormsByAgency.asp) contains a uniform fee disclosure form you can use when selecting a provider for your 401(k) plan.
Once your plan has been established, you may be able to lower your costs by eliminating unnecessary assessments such as wrap-around fees, which some mutual fund companies charge for administering funds other than their own. In addition, increased employee deferral contributions may allow you to reduce the contribution your company has to make in order to satisfy nondiscrimination requirements.
How can you encourage increased employee contributions? Employee communications, such as newsletters, help convey the importance of investing for retirement. Other options include offering a company match on contributions and automatic enrollment in the program for new employees.
Q. What are my legal responsibilities as a sponsor of a 401(k) plan?
A. Sponsors of 401(k) plans are considered fiduciaries, subject to regulations under the Employee Retirement Income Security Act of 1974 (ERISA), a federal law that sets minimum standards for most pension and benefits plans. The primary responsibility of fiduciaries is to run the plan solely in the interest of participants and beneficiaries and for the exclusive purpose of providing benefits and paying plan expenses. A common term for the fiduciary´s decision-making process is the prudent investor rule, which states that a fiduciary must act with the same care, skill, prudence and diligence under the circumstances that a prudent person, acting in a similar capacity and familiar with such matters, would use. Ensuring the plan has diversified investment options in order to minimize the risk of large losses is one example of a fiduciary´s duty under ERISA.
For more information on ERISA requirements, visit the Department of Labor Web site at http://www.dol.gov/dol/topic/health-plans/erisa.htm
Q. How many funds should our plan offer?
A. One might think that the more funds a plan offers, the better employee participation will be. Not necessarily. A study by economists at Columbia University found that 401(k) plan participation is higher when employees are offered fewer fund choices. In plans with only two investment choices, 75% of workers participate. In plans with 60 investment options, enrollment drops to 60%.
According to the 45th Annual PSCA Survey of Profit Sharing and 401(k) Plans (2002), the average 401(k) plan offers 15 mutual funds for participant contributions. And, according to the survey, the average participant chooses 4.7 funds in which to invest.
When choosing funds for your company´s 401(k) plan, aim for a diverse collection of funds. This doesn´t necessarily mean a large number of funds. Typical core funds for a 401(k) plan include an index fund, and intermediate bond fund, a stable value or money market fund, an international fund, and a mixture of large-, mid- and small-cap growth and value funds.
Q. On what basis should funds be selected for the plan?
A. Selecting mutual funds for your 401(k) plan can be a complicated, time-consuming task. Many plan sponsors hire an investment management consultant to help them save time and money during the fund selection process. Whether you choose to hire a consultant or manage the design of your 401(k) plan in house, consider these issues:
Q. What are model portfolios, and how can they be used within my 401(k) plan?
A. A model portfolio is a prepackaged collection of mutual funds available as a single investment choice for plan participants. Model portfolios are composed of your plan´s core fund lineup, and they allow participants to invest in a variety of funds quickly and easily, based upon their tolerance for risk. For instance, your plan might offer an aggressive portfolio heavily weighted toward stock mutual funds and focused on growth, in addition to a conservative portfolio emphasizing fixed-income funds and focused on the protection of principal. Another benefit of model portfolios: You may direct the plan sponsor to rebalance them automatically, such as once per quarter or one time a year. Rebalancing means reestablishing the original percentage mix of investments within your 401(k) account. Why is rebalancing so important? Changes in the stock market may cause an investor´s portfolio holdings to shift so that they no longer meet that individual´s tolerance for risk. Automatic rebalancing helps realign an investor´s assets according to their original asset allocation preferences.