Across the United States, over 95% of all defined contribution plan expenses are imbedded in plan investments rather than paid separately. Because no one is writing a check for these expenses and the cost structure is difficult to identify, many organizations are paying excessive fees that directly reduce investment returns. That “free” or low cost plan may go easy on the plan sponsor’s budget but hit plan participants where it hurts the most – in their financial security during retirement. “After fee negotiation, one of our larger clients reduced their fees by 49% while upgrading services and locking up future fees”, says Mike Montgomery, Managing Principal of Montgomery Retirement Plan Advisors. “Money formerly wasted is now building retirement income for participants”.

Other fees may be deferred, costing nothing at the moment but lying imbedded in your contract until they erupt in an expensive surprise when you leave your investment provider.

Consider the following common fee pitfalls:

• Fees buried inside investment funds
  Action Step: Conduct a full cost / revenue analysis at least annually. Use an outside expert that specializes in this and represents your interests. If you want detailed answers, you have to know the right questions to ask.
• Fees increase in proportion to assets rather than services
  Action Step: Your retirement plan provider doesn’t need to be paid twice as much just because your plan doubles in asset size. Find out the factors that actually drive recordkeeping costs and negotiate a fair fee structure based on these costs.
• Failure to contractually cap the true cost of services
  Action Step: Once plan size reaches about $10 Million dollars, many providers may be willing to lock in their required revenue and will return excess fees to the plan. Once you negotiate this in your contract, you will have taken back control of your plan costs, so the importance of this step cannot be overstated.
• Conflicts of interest from revenue sharing arrangements and proprietary funds
  Action Step: Are your provider’s enrollers and materials steering your employees into funds that are best for the participant, or to the funds that generate the most revenue? Find out how much everyone is paid from each fund.
• Failure to update contracts
  Action Step: Retirement plan fees have fallen dramatically over the last decade due to competitive pressures and improved efficiency. If your contract is more than three or four years old, chances are good that you are paying more than your provider would charge you as a new customer. One of the best kept secrets of the 401(k) industry may be that the books are balanced on the backs of long-term, loyal customers.
• Undisclosed or incomprehensible “market value adjustment” formulas on Fixed / Guaranteed Accounts
  Action Step: Upon filing notice to terminate their contract, one plan sponsor recently received notice that they owed hundreds of thousands of dollars in fees based upon a calculation called a “Market Value Adjustment” which was disclosed in their contract only with the words “Formula available upon request”. Most older insurance company contracts contain these potentially costly clauses. Address this issue while you still have negotiating leverage -- well before you change providers.

For further guidance on this topic please contact us at info@m-rpa.com. Acting as an expert advocate to put our clients in control of their plan fees is a key service provided by Montgomery Retirement Plan Advisors. Call or e-mail to discuss the first step toward gaining control of your plan costs – a thorough cost / revenue analysis to identify and reduce fees.

Survey Says: Plan Sponsors To Restore Matches & Add New Plan Features

According to a recent survey by Hewitt & Associates, 80% of plan sponsors that suspended or reduced their match in 2009 are planning to restore it in 2010. The survey (which polled 162 mid to large sized plan sponsors covering 5.7 million participants) also revealed that 60% of plans already offer Automatic Enrollment and 27% more plan to add this feature during the year. 38% of companies surveyed indicated that they intend to implement Automatic Escalation and almost half say they are likely to implement Automatic Rebalancing. Finally, more plans are expected to offer investment advice at the participant level by a qualified independent investment advisor. Other available plan features receiving consideration are the Roth option and the possibility to add a retirement annuity solution (which is becoming more popular as the products in the marketplace mature).

2009 Back-Study Supports Veracity of Scorecard^SM System

Fallout from 2008, one of the worst years in stock market history, continues to cloud the landscape. This head-spinning period raises a key question: “Did our funds, our managers really do that badly?” To allay client concerns, Retirement Plan Advisory Group (RPAG) conducted a 5-year Back-Study of its proprietary ScorecardSM System, which Montgomery Retirement Plan Advisors uses as it primary investment analytical tool. The study supports evidence that the best managers are adding value despite lower account balances. Study objectives were to gather comprehensive data over separate multi-year periods to test ex-post and ex-ante results; test against the Russell 1000® Large Cap Growth Index as the benchmark; and, prove the analytics required for sound investment strategy.

In summary, the Back-Study Report concluded that:

• 93% of funds scoring acceptably (7-10) outperformed the benchmark at the beginning and end of the study;
• The remaining 7% of funds scoring acceptably, but underperforming the benchmark, maintained a more consistent style, lower risk, and outperformed funds Scoring 6 or below; and
• Top-ranked large cap growth funds (9-10) outperformed by 2.03%.

“The study validates the Scorecard System’s authority as an effective tool to manage and reduce investment risk,” said Jeff Elvander, CFA, Chief Investment Officer for RPAG. “The net takeaway from this research is to pay closer attention to return statistics than mere returns.”

For more information or to request a copy of the Back-Study Brief, please contact us. Our phone number and e-mail address is shown elsewhere in this newsletter.

Plan Loan Reminders

The great majority of plans allow participants to borrow from their accounts, but the plan document must specifically provide for such loans. Plan loans are allowed by law, but they are not required. In fact, many successful plans do not offer any participant loans. There are a few limitations or restrictions on the use for loans, including that plan loans must be reasonably available to all participants, but for the most part sponsors can be somewhat creative in how they design their loan policies. For instance, employers may restrict loans for specific reasons, limit the number of loans outstanding at one time, or require a minimum amount (typically $1,000). If your plan allows for participant loans, remember to strictly adhere to the terms of your plan document or loan policy.

Generally, unless the plan document is more restrictive, a participant is allowed to borrow up to 50% of their vested account balance to a maximum of $50,000. If the participant had a plan loan in the last 12 month period, they will be limited to 50% of their vested account balance, or $50,000, minus the outstanding loan balance in the preceding 12-month period, whichever is less.

Typically, loan payments are deducted from the participant’s payroll checks. A loan must be paid back over five years unless the plan document allows for the repayments to be extended for the purchase of a home. If the participant is married, some plans require that the employee’s spouse consent to the loan.

While interest rates vary by plan, we typically see the loan rate set as "prime rate" plus one or two percent. The current "prime rate" can be readily found in business publications. Many vendors place the responsibility directly on the plan sponsor to establish and reset this rate as warranted. If you are unsure, we encourage you to check with your vendor to see if you, as the plan sponsor, should be manually setting the participant loan rate and how to do so.

When processing a loan request, make sure the participant is clear when indicating which of their investments should be liquidated to fund the loan. In addition, make sure you understand if your vendor has a default investment to fund the loan, if not indicated on the loan paperwork. A loan cannot be rolled over to an IRA.

Remember, if the participant terminates employment and is unable to repay the loan, then it is considered defaulted and be deemed a distribution. In other words, the unpaid loan will result in income for that tax year. That amount will then be subject to federal and state income taxes as well as a 10% early withdrawal penalty if the participant is younger than age 59 ½. Typically plans allow for a 30-90 day grace period after termination of employment requiring full repayment of a loan. Take time to make sure you understand your plan document’s and your vendor’s grace periods. Loan defaults, if not handled correctly, can be considered a prohibited transaction.

Communication Corner: Borrowing From Your Retirement Account

This month’s sample participant communication memo outlines a few important (and costly) drawbacks of borrowing money against your retirement savings. E-mail info@m-rpa.com for copy that you can print and distribute to employees.

This material is intended for informational purposes only and should not be construed as legal advice and is not intended to replace the advice of a qualified attorney, tax adviser, investment professional or insurance agent. Montgomery Retirement Plan Advisors does not warrant and is not responsible for errors or omissions in the content of this newsletter.

Securities and investment advisory services offered through Financial Telesis Inc. Member FINRA / SIPC. Montgomery Retirement Plan Advisors and Financial Telesis Inc. are not affiliated.