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You Can't Become Rich In Your Pocket Until You Become Rich In Your Mind | ||||
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The investment of the money would truly be under the employees control and under the guidance of a personal financial advisorREAL CONTROL The 401(k) concept is sound. Encouraging people to take responsibility for their own wealth is the right approach. But the only way this can be accomplished fairly is by actually giving employees the control that they are being told they have. The conflicts of interest that are bound to occur cannot be legislated out of the system. There are already regulations in this regard that are not being enforced. What we propose is that no single corporate 401(k) account be allowed to accumulate more than $2,000,000. What needs to happen is that payroll systems should funnel employee deductions directly into a participants IRA accounts, which they can set up wherever they wish. This account should be called John Does 401 (k)/IRA. If the employer makes matching contributions, this money should be directed in the same way to an adjoining account labeled XYZ Corporation/Match for the Benefit of (FBO) John Doe. A profit-sharing contribution would be directed to a parallel account labeled XYZ Corporation/Profit Sharing FBO John Doe. In this way money would revert back to the company if the employee left before they were vested. The technology is available to do this. Asecondary benefit would be that the plan sponsor would no longer have to be responsible for whether an employee contributed too much money, failed to pay back a loan, or needs a distribution. All of this would be dealt with at the financial institution that held the employees accounts and reported directly on the employer s tax return. The investment of the money would truly be under the employees control and under the guidance of a personal financial advisor. Until the system we have proposed can be adopted, the following steps should be taken by all sponsors of 401(k) plans. These ideas are not new. For example, the requirement that an investment policy statement must be drafted has existed for years. The problem is, most people we talk to who are responsible for 401(k) plans still do not even know what it is. The Profit Sharing/401K Council of America estimates that only half of all 401(k) plans have one. The retirement triad is made up of Social Security, pension/defined benefit plans, and 401(k)s. We know Social Security is in question; we have explained why pension plans look dubious; and unless the steps outlined next are adopted by all 401(k) plans immediately, the unfolding of the new dominant investment system will be lost on 401 (k) plan participants as well. The 401(k) Business Plan 1. Together with an experienced investment advisor all companies should adopt an investment policy statement for their 401(k). Topics covered should include Age and dynamics of the workforce The fact that the fund menu selected must enable each plan participant to achieve an investment allocation that will fit into what we call their investment zone A list of all styles and assets classes to be included The parameters by which a fund will be selected for or termi nated from each asset class The methodology by which the funds will be monitored on both a qualitative and quantitative basis The mechanism that will allow employees to rebalance and reoptimize their portfolios How all of the above will be communicated to employees 2. The investment policy statement becomes the action plan for the 401(k). It should be executed immediately. 3. Once the plan is set up correctly, participants can follow the in vestment guidelines from Chapter 3 to manage their 401(k) just as they do the rest of their assets. SAMPLE 401(k) INVESTMENT POLICY STATEMENT Courtesy of Profit Sharing/401(k) Council of America (PSCA) Part I. THE PLAN The ABC Company sponsors the ABC Defined Contribution Plan (The Plan) for the benefit of its employees. It is intended to provide eligible employees with longterm accumulation of retirement savings through a combination of employee and employer contributions to individual participant accounts and the earnings thereon. The Plan is a qualified employee benefit plan intended to comply with all applicable federal laws and regulations, including the Internal Revenue Code of 1986, as amended, and the Employee Retirement Income Security Act (ERISA), as amended. (Optional: The Plan is intended to comply with ERISA Section 404c.) The Plans participants and beneficiaries are expected to have different investment objectives, time horizons, and risk tolerances. To meet these varied investment needs, participants and beneficiaries will be able to direct their account balances among a range of investment options to construct diversified portfolios that reasonably span the risk-return spectrum. Participants and beneficiaries alone bear the risk of investment results from the options and asset mixes that they select. Part II. THE PURPOSE OF THE INVESTMENT POLICY STATEMENT This investment policy statement is intended to assist the Plans fiduciaries ensuring that they make investment-related decisions in a prudent manner. This outlines the underlying philosophies and processes for the selection, monitoring, and evaluation of the investment options and investment managers utilized by the Plan. Specifically, this Investment Policy Statement Defines the Plans investment objectives Defines the roles of those responsible for the Plans investments Describes the criteria and procedures for selecting investment option invest ment managers Establishes investment procedures, measurement standards, and monitoring procedures Describes ways to address investment options and investment management that fail to satisfy established objectives Provides appropriate diversification within investment vehicles (Optional) Describes the Plans approach to unrestricted investment options (mutual fund window and self-directed brokerage), company stock, and advice This Investment Policy Statement will be reviewed at least annually, and when appropriate, can be amended to reflect changes in the capital markets, plan participant objectives, or other factors relevant to the Plan. Part III. INVESTMENT OBJECTIVES The Plans investment options will be selected to Maximize return within reasonable and prudent levels of risk Provide returns comparable to returns for similar investment options Provide exposure to a wide range of investment opportunities in various as set classes Control administrative and management costs Part IV. ROLES AND RESPONSIBILITIES Those responsible for the management and administration of the Plans investments include, but are not limited to the following: The ABC Company, which is responsible for selecting the trustee(s); hiring the record keeper and/or investment advisory consultants; and appointing the members of the investment committee (if one exists). If there is not investment committee the ABC Company is also responsible for Establishing and maintaining the Investment Policy Statement Selecting investment options Periodically evaluating the Plans investment performance and recommending in vestment option changes Providing Plan participant investment education and communication The Plans trustee(s), which is responsible for holding and investing plan assets in accordance with the terms of the Trust Agreement. The investment managers, which are responsible for making reasonable investment decisions consistent with the stated approach of the Plan, and reporting investment results on a regular basis as determined by the Plan fiduciaries. The record keeper, which is responsible for maintaining and updating individual account balances as well as information regarding plan contributions, withdrawals, and distributions. The Investment Committee (if there is one), which is responsible for Establishing and maintaining the Investment Policy Statement Selecting investment options Periodically evaluating the Plans investment performance and recommending in vestment option changes Providing Plan participant investment education and communications Part V. SELECTION OF INVESTMENTS AND MANAGER The selection of investment options offered under the Plan is among the ABC Company/investment committees most important responsibilities. Set forth in the following are the considerations and guidelines employed in fulfilling this fiduciary responsibility. Investment Selection The Plan intends to provide an appropriate range of investment options that span the risk-return spectrum. Further, the Plan investment options will allow all Plan participants to construct portfolios consistent with their unique individual circumstances, goals, time horizons, and tolerance for risk. Major asset classes offered will include the following: (This is where the classes of investments to be included in the Plan are to be listed. The appropriate benchmark and peer group for each investment will be noted.) After determining the asset classes to be used, ABC Company/the investment committee must evaluate investment managers and choose managers to manage the specific investment options. Each investment manager must meet certain minimum criteria: 1. It should be a financial services provider, investment management com pany, or an investment advisor registered under the Registered Investment Advisers Act of 1940. 2. It should be operating in good standing with regulators and clients, with material pending or concluded legal actions. 3. It should provide detailed additional information on the history of the firms investment philosophy and approach, and its principals, clients, locations, schedules, and other relevant information. Assuming the minimum criteria are met, the particular investment under consideration should meet the following standards for selection: . Performance should be equal to or greater than the median return for an appropriate, style-specific benchmark and peer group over a specified time. 2. Specific risk and risk-adjusted return measures should be established and agreed to by ABC Company/the investment committee and be within a reasonable range relative to an appropriate style-specific benchmark and peer group. . It should demonstrate adherence to the stated investment objective. 4. Fees should be competitive compared to similar investments. 5. The investment manager should be able to provide all performance holdings and other relevant information in a timely fashion, with specified frequency. Part VI. INVESTMENT MONITORING AND REPORTING The ongoing monitoring of investments must be a regular and disciplined process. It is the mechanism for revisiting the investment option selection process and confirming that criteria originally satisfied remain so and that investment option continues to be a valid offering. While frequent changes are neither expected nor desirable, the process of monitoring investment performance relative to specified guidelines is ongoing. (continued) Monitoring should occur on a regular basis (e.g., quarterly) and utilize the criteria that were the basis of the investment selection decision. It will include a formal review annually. Further, unusual, notable, or extraordinary events should be communicated by the investment manager immediately to ABC Company/the investment committee. Examples of such events include portfolio manager team departure, violation of investment guidelines, material litigation against the firm, or material changes in firm ownership structure or announcements thereof. If overall satisfaction with the investment option is acceptable, no further action is required. If areas of dissatisfaction exist, the investment manager and ABC Company/the investment committee must take steps to remedy the deficiency over a reasonable period. If the manager is unable to resolve the issue, termination may result. Part VII. MANAGER TERMINATION An investment manager should be terminated when ABC Company/the investment committee has lost confidence in the managers ability to Achieve performance and risk objectives Comply with investment guidelines Comply with reporting requirements Maintain a stable organization and retain key relevant investment profes sionals are no hard and fast rules for manager termination. However, if the investment manager has consistently failed to adhere to one or more of the previous conditions, it is reasonable to presume a lack of adherence going forward. Failure to remedy the circumstances of unsatisfactory performance by the investment manager, within a reasonable time, shall be grounds for termination. Any recommendation to terminate an investment manager will be treated on an individual basis, and will not be made solely based on quantitative data. In addition to those listed previously, other factors may include professional or client turnover or material change to investment processes. Considerable judgment must be exercised in the termination decision process. A manager to be terminated shall be removed using one of the following approaches: Remove and replace (map assets) with an alternative manager Freeze the assets managed by the terminated manager and direct new assets to a replacement manager Phase out the manager over a specific time period Continue the manager but add a competing manager Remove the manager and do not provide a replacement manager Navigate the manager to a brokerage window (if available) Part VIII. PARTICIPANT EDUCATION AND COMMUNICATION The Plan will communicate to employees that they control their own investments, permit investment changes at least quarterly, and provide efficient educational materials allowing employees to make informed decisions. Part IX. COORDINATION WITH THE PLAN DOCUMENT Notwithstanding the foregoing, if any term or condition of this investment policy conflicts with any term or condition in the Plan, the terms and conditions of the Plan shall control. Part X. FURTHER GUIDELINES (optional) Mutual Fund Windows In an effort to provide some (but not total) investment flexibility, a mutual window option is offered as a way of providing additional investment options to Plan participants. In developing and maintaining the Plans mutual fund window, ABC Company/the investment committee will evaluate the window provider for reasonable cost, fund availability, competitive service capability, and participant satisfaction. There will be an annual review to confirm competitiveness. Self-Directed Brokerage In an effort to provide total investment flexibility, a self-directed brokerage option is offered in the Plan. The Plans self-directed brokerage option allows participants to invest in any publicly traded security, including stocks, bonds, and mutual funds, with the following exceptions: short sales, options, future limited partnerships, currency trading, and trading on margin. In developing and maintaining the Plans self-directed brokerage option, ABC Company/the investment committee will evaluate the self-directed option provider for reasonable cost, competitive service capability, and participant satisfaction. There will be an annual review to confirm competitiveness. Company Stock ABC Company stock is offered as an investment option pursuant to the terms of the Plan. Plan fiduciaries will be responsible for managing the investment Plans assets in company stock according to the Plan document. ABC Company/the investment committee will monitor the performance of ABC Company stock but not for the purpose of recommending levels of company stock investment in the Plan or the elimination of company stock as a Plan investment as they may have access to inside information. Advice As with any designation of a service provider to the plan, the designation of a company or individual to investment advice to plan participants and beneficiaries is an exercise of discretionary authority and control with respect to management of the plan. Therefore, ABC Company/the investment committee will act prudently and solely in the interest of the plan participants and beneficiaries both in making such designation(s) and in continuing such designation(s). At a minimum, the investment advice by the selected provider should be unbiased and be based on sound asset allocation theory and in-depth fund analysis. It should also be tailored to each participants circumstances. Monitoring will occur on an annual basis and utilize the same criteria that forms the basis of the investment advisor selection decision. Two weeks ago our team presented our 401(k) services to a potential new client. We were given two hours to speak to the committee. The investments topic ran five minutes over, and two committee members left. Heres how the agenda unfolded. This shows another aspect of the matrix in which 401(k) plans are entangled. It is the labyrinth of regulations so complex that entire industries have grown up within the legal, accounting, and computer science fields to support it. The allocation of time devoted to these issues in the agenda just shown is likely to reflect the expenditure of time and energy during any given period that is spent on these different areas. We have no study to support this, but most of our colleagues in the 401(k) business agree with our assessment. The percentage of time and effort devoted to proper investment methodology is miniscule compared to what is spent in regulatory, compliance, and technical issues. This could be justified if it served to protect employees, but it does not. The excessive amount of regulations that already exist did not protect Enron employees in 2002 from losing their retirement assets. A full grounding in the facts of the new Dominant Investment System, and the techniques that must be used to invest in it as outlined in Chapter 3, would have. But there is no time for that. The dismantling of the large pools of 401(k) assets should be accompanied by a repeal of at least two-thirds of the legislation in which they are mired. Most of it looks like this: Top-heavy status is measured on a determination date, which is generally the last day of the preceding plan year (December 31 for calendar-year plans). Prior to EGTRRA [Economic Growth and Tax Reconciliation Act of 2001], distributions made over the preceding five years are included in the top-heavy calculation (first-year lookback). However, under EGTRRA, certain changes will take effect starting in 2002 regarding the top-heavy calculation. First of all, the five-year look-back will, in most cases, be replaced by a one-year lookback. So, effective for the 2002 year, with the exception of in-service distributions, only distributions made during the one-year period ending on the determination date will be included when determining the value of the non-key employees account. Second, a participant who was not an active employee at any time during the year ending on the determination date would have his or her balance excluded from the top-heavy calculation. Because nonkey employees (generally nonowners) are more likely to terminate employment or take a distribution, excluding their distributions from the account value will likely reduce the accounts of non-key employees more than the accounts of key employees. For most plans, this will increase the likelihood, and the plan will be top-heavy. Keeping up with these constantly changing complex regulations is an unnecessary burden on human resources departments and corporate administrators. Much of it centers around preventing highly compensated employees and owners from avoiding taxes by putting an unfair share of their income into retirement accounts. In the new customized environment in which we live, this can easily be dealt with on a person-by-person basis through individual tax returns. |
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