An Investor’s Worst Enemy

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An Investor’s Worst Enemy

Jamie Kertis, AIF®, QKAjamie kertis headshot
Retirement Plan Specialist
Grinkmeyer Leonard Financial
1950 Stonegate Drive / Suite 275 /Birmingham, AL 35242
Office: 205.970.9088 / Toll-Free: 866.695.5162
www.grinkmeyerleonard.com

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The Highs and Lows of Auto-Enrolls

checkThere is a fascinating social science study that was conducted by Eric Johnson and Daniel Goldstein that studied the willingness of people across European countries to donate their organs after they pass away (stay with me since I know this seems to have nothing to do with your 401(k) plan). They compared Denmark and Sweden, Austria and Germany, the Netherlands and Belgium and France and the U.K.; the countries were paired based on their similarities in culture, religion, and norms. However, despite the likenesses there were significant discrepancies in their organ donation opt-in rates: Denmark’s opt-in rate was 4.25% while Sweden was at 85.9%, Germany was at 12% while Austria was at 99.98%, the Netherlands was at 27.5% while Belgium was at 98%, and finally the UK was at 17.17% while France was at 99.91%. So what could possibly explain the significant differences in these similar countries? As it turns out, it was a simple difference in the design of the organ donation opt-in process on the form at the D.M.V. In the countries where the form in set as “opt-in”, check a box if you would like to donate, people tended not to check the box and therefore do not become part of the program. The countries where the box on the form read “opt-out”, check if you do not want to participate, people do not check the box and are automatically enrolled in the program. The conclusion of the study was not that people do not care about whether or not their organs are donated postmortem, but rather how small changes in our environment, “opt-in” versus “opt-out” can shape our decisions.

Which brings us to the discussion of automatic enrollment in a 401(k) plan and the subsequent effects on your plan – the highs and the lows. While the concept of automatic enrollment, or negative election, has been in place since the mid-1990s, the Pension Protection Act of 2006 encouraged and therefore accelerated the use of automatic enrollment provisions within 401(k) plans by removing some of the regulatory requirements. Furthermore, the IRS eased some of the restrictiveness of correction methods for automatic enrollment in Rev. Proc. 2015 – 28 (https://www.irs.gov/pub/irs-drop/rp-15-28.pdf). With the groundwork laid for the use of automatic enrollment, let’s examine the pros and cons to adding this plan design feature.

High – Increased Participation
The most obvious high of adding automatic enrollment to your 401(k) plan is an increase in participation. When making the decision to amend your plan to add the provision, there are two choices; make automatic enrollment effective for all eligible employees or just for those who become eligible after the provision is put in place. If you elect to enroll all eligible employees, there’s a better chance that you will see a dramatic impact in participation numbers. We work with a lumber company that opted to make the automatic enrollment provision effective for all eligible employees and their participation rate doubled virtually overnight. With greater participation, the plan may be more likely to pass annual compliance testing and will have an employee population that may be better prepared to retire.

Low – Stagnant Deferral Rates
The fear with adding automatic enrollment without auto-escalation, increasing deferral percentages on a set schedule until a certain level is reached, is that participants will get enrolled in the plan at the designated deferred percentage, typically 3%, and then never give another thought to increasing their deferral percentage. While 3% is certainly better than 0%, 3% will more than likely not get your participants to their retirement goals. In order to combat stagnant deferrals, a regular and meaningful education program should be put into place along with utilizing GAP analysis tools that can illustrate what your participant’s current deferral amount will equate to in retirement income.

High- Flexibility within the Automatic Enrollment Provisions
The number one reason that we hear as to why a company is hesitant to add an automatic enrollment provision is that they are afraid their employees will be frustrated that their money was contributed without their consent and now it is locked into a plan they don’t want to participate in. The easiest way to avoid this situation is by selecting the correct automatic enrollment arrangement. There are three types: basic automatic enrollment 401(k) plan, eligible automatic contributions arrangement (EACA) and qualified automatic contribution arrangement (QACA). The basic feature is what most employers understand automatic enrollment to be, a stated percentage of eligible employee’s wages will be automatically deducted from each paycheck unless the employee elects to not participate. The EACA allows automatically enrolled participants to withdraw their contributions with 30 to 90 days of the first contribution without penalty (standard tax rates apply); thereby solving the concern that participants may be unable to access their money.   Finally, the QACA plan design allows the plan to automatically pass certain annual compliance tests and must include features such as a fixed schedule of automatic employee contributions, employer contributions, a special vesting schedule, and specific notice requirements.

Low – Increased Plan Costs
There is a pretty good chance that as your plan adds participants and assets, the costs will rise in potentially a few ways. First, if your company offers a match, then the more participants there are contributing to the plan, the more the company will owe in company match. Second, depending on your contract with your 401(k) plan providers, more participants could mean higher cost if there is a per head fee and/or greater assets could lead to a higher dollar amount if the fees are based on plan assets. When your plan opts to add automatic enrollment, the plan should also consider renegotiating provider fees in order to make sure that the change in participation and assets will not negatively impact the appropriateness of the fees.

As with any plan provision, it is important that the plan committee closely examine all of the highs and lows of amending the 401(k) plan. Please let me know if I can be of any assistance in assessing whether adding automatic enrollment would be appropriate for you plan.

Jamie Kertis, AIF®, QKAjamie kertis headshot
Retirement Plan Specialist
Grinkmeyer Leonard Financial
1950 Stonegate Drive / Suite 275 /Birmingham, AL 35242
Office: 205.970.9088 / Toll-Free: 866.695.5162
www.grinkmeyerleonard.com

Contact Jamie

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Take Care of Your Employees

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Take care of your employees.

Jamie Kertis, AIF®, QKAjamie kertis headshot
Retirement Plan Specialist
Grinkmeyer Leonard Financial
1950 Stonegate Drive / Suite 275 /Birmingham, AL 35242
Office: 205.970.9088 / Toll-Free: 866.695.5162
www.grinkmeyerleonard.com

Contact Jamie

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Plan Resolutions

shutterstock_350434298I have to admit that I do not believe in New Year’s resolutions. I prefer to let the glitter settle, the pressure diminish and the stress of getting the kids back into their school schedule wane before making any life altering promises or commitments. However, that is not to say that I do not think there are some very important lessons that can be learned from taking a moment to look back at the past year and assessing what we’ve learned and what we can do better. With this in mind and focusing on the results of the Rocaton/Pensions & Investments 2015 Survey of Defined Contribution Viewpoints (http://www.rocaton.com/files/2015DCSurvey.pdf), let’s take a look at what is on the mind of plan sponsors like you and examine ways to take these worries and turn them into advantages.

Resolution 1: Increase Participation and Savings Rates

By a landside margin, 49% of plan sponsors said that participant’s participation and savings rates were the number one item keeping them up at night. With good reason when you consider America’s aging workforce and lack of retirement savings. We believe that the only tried and true way to really move the needle in both participation and savings rates is to implement a meaningful education plan. Case in point, we work with a bridge building company that over the last three years has increased participation from 61% to 80% by conducting a combination of one-on-one meetings with employees, group education events and education events geared at the management team who is in the field with the laborers. It should also be noted that we implemented an automatic enrollment provision which also gave the plan a much needed boost in enrollments. In a later blog we will look at the pros and cons of adding auto-enrollment and how it is imperative to include education with auto-enroll.

Resolution 2: Improving Participant Communications

While improving communications did not register highly with what is keeping plan sponsors up at night, it was at the top of the list for the three top priorities over the next 12 months with a whopping 71% response rate. It is understandable that for a plan sponsor to address their main concern of increasing participation and savings there needs to be a solid communication strategy in place. This can be tricky considering that there is not necessarily one method that is guaranteed to reach and impact all plan participants. The first step can be to make sure the recordkeeper you are working with that provides the participant website and statements offers Gap Analysis. Gap Analysis is a tool that illustrates to the participant what monthly amount of income they will need to generate in retirement in order to replace 75% – 80% of their pre-retirement monthly income. Good Gap Analysis tools will also let the participant enter outside sources of savings and income along with debts to get a clearer picture of their retirement outlook. Along with offering tools, we also believe that what you are putting in front of your participants must be delivered in a way that they will actually comprehend. For our clients, we offer a monthly video and short written excerpt delivered through email that is about a pertinent topic; January’s installment dealt with naming and updating beneficiary information. Also, check out what your 401(k) providers have in ways of participant communication and make sure that before it is sent out that you read it or watch it to ensure that it will have a positive impact on your participants.

 Resolution 3: Addressing Fees

Addressing fees was middle of the pack in what keeps plan sponsors up at night, but second in priorities for the next twelve months. My theory on why it may not be keeping many plan sponsors up is because it is hard to stress about something that you don’t truly understand. To clarify, if as a plan sponsor you do not have a complete understanding of how much the fees are or how they are being collected, then it is hard to agonize about how to make them better. Therefore, my first step in addressing fees would be to complete a thorough benchmarking assessment of your 401(k) plan provider against other providers in your market space. Not only does the Department of Labor require that your plan complete a benchmarking every 3 years, but also asking your provider to clearly spreadsheet their fees can go a long way in understanding and possibly reducing what the plan is paying. It has been my experience that your plan provider is not going to come right out and offer you a discount, but when pressed you may be pleasantly surprised on what they are willing to do. For example, in the summer of 2014 we conducted a Request for Proposal (RFP) Benchmarking report for a software company that was currently be billed $20,000 annually plus what the provider was receiving in revenue from the investments in the plan. After running the RFP, the provider cut their billable fee in half to $10,000 annually just by asking! The second step is to investigate what your provider is receiving from the investments in your plan. This can be tricky and rather frustrating because this information is not always made readily available, but it is so vitally important because it can have the greatest impact on the most highly compensated individuals participating in the plan. To simplify, if the provider is receiving 25 basis points or 0.25% from the investments, then the more money you have invested the more money you are paying in fees. To be clear, that is a very simplistic explanation and much more research is needed to really get to the bottom of what your provider is receiving from the investments, but at least it’s a start.

According to Statistic Brain Research Institute (http://www.statisticbrain.com/new-years-resolution-statistics/), only 8% of people are successful in keeping their resolutions each year, but by making resolutions for your 401(k) plan that are definable and actionable and by partnering with the right resources to help you succeed, I feel confident that you can be in that 8%! Please contact me at 205-970-9088 or jamie@grinkmeyerleonard.com if you would like a better way to get to your plan resolutions.

Jamie Kertis, AIF®, QKAjamie kertis headshot
Retirement Plan Specialist
Grinkmeyer Leonard Financial
1950 Stonegate Drive / Suite 275 /Birmingham, AL 35242
Office: 205.970.9088 / Toll-Free: 866.695.5162
www.grinkmeyerleonard.com

Contact Jamie

Follow Jamie on LinkedIn

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On Shaky Ground

shutterstock_305483711The stock market of 2016 seems to have picked up right where it left off in 2015 on shaky ground with dramatic downswings and nagging uncertainty. Admittedly, we all had become a little spoiled by the last bull market which started in March of 2009 and persisted until the third quarter of 2015 and we have been thrown back into the harsh reality that even though the S & P 500 has had an overall upward movement since it was introduced in 1923 there has been and more than likely always will be an element of volatility. As a matter of fact, when you take a look at the history of the stock market from 1928 to 2013 you will find that a decline of at least 10% occurs on average every 11 months and a decline of 20% happens about every 4 years.  So the question is what can you as a plan sponsor do to help ease some of queasiness caused by these ups and downs.

Process, Procedures and Prudence

As I have discussed in previous blogs, I believe the number one thing that plan sponsors can and should do to protect themselves and the plan against market volatility and investment performance is to have a documented process with written procedures that demonstrate prudence in selection and monitoring in place. You can argue until your blue in the face about the best investment in each asset class, but when it comes down to it performance takes a backseat to process. Now more than ever, it can be important to review the plan’s Investment Policy Statement (IPS) and to review the committee that is place to execute that IPS.   There are also notices such as the 404(c) notice and the 404(a)(5) notice that you can send out to your participants that describe the participant’s right to direct their own investments and to gather information regarding those investments.

Monitoring

While sometimes the best investment strategy within a 401(k) plan for a participant can be “set it and forget it”, the same is not true for the investment committee and the monitoring of the investments within the 401(k) plan. Once the committee has decided on an appropriate investment menu for the plan, the committee must also monitor those investments for continued appropriateness. A word of caution here, many recordkeepers and investment providers have tools that can help the committee monitor performance, but they may or may not consider other factors such as the demographic make-up of the participants, the overall risk tolerance of the plan, the cost of the investments and/or the availability of alternative investments.

Dollar Cost Averaging

Google “time in the market versus timing the market” and you will find countless articles that preach the value of a buy and hold strategy and that bemoan the fact that most average investors buy high and sell low. This concept of buy and hold, while not appropriate for every investor, is of particular interest in 401(k) plans because of the power of dollar cost averaging. Dollar cost averaging is the practice of investing a regular amount of money regardless of the performance of the market and therefore, the average cost of investments has the chance to decrease while your chance of greater returns increases.

The beauty of consistent contributions into a 401(k) plan is that a participant can participate in dollar cost averaging without even realizing it! A note about dollar cost averaging, dollar-cost averaging is not a foolproof investment technique. It does not assure a profit or protect against loss in declining markets. It involves continuous investment in variably priced units, regardless of price fluctuations. Investors contemplating the use of dollar-cost averaging should consider their ability to continue purchases over a period of time even when prices are low.

Education

Knowledge is power which leads to confidence and calm; this is very evident in 401(k) plans when it comes to the comfort of the average participant in investing his or her hard earned money in an investment that they have little to no control over. When we conduct employee education meetings the first tenant that we attempt to convey is that of risk tolerance. We believe that if a participant understands and is comfortable and confident in the amount of risk that he or she is taking, then that participant is less likely to stop investing in times of market volatility. Additionally, we find too often participants do not have a realistic expectation of investment performance due to a lack of education about the investments in their plan which leads to confusion and frustration and ultimately a decline in participation. We take the time to educate our participants about the level of risk and the potential return that they may receive for taking on that risk.

While the recent markets have caused even the most seasoned investor to reach for aspirin, there are steps that you can take as a plan sponsor to insulate yourself, your plan and its participants from the headaches of volatility. If you need further guidance or have questions about the current market condition, I would love to hear from you. Please contact me at 205-970-9088 or jamie@grinkmeyerleonard.com.

Disclosure:  Certain sections of this commentary contact forward-looking statements that are based on our own reasonable expectations, estimates, projections and assumptions. Forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict. All indices are unmanaged and investors cannot actually invest directly into an index. Unlike investments, indices do not incur management fees, charges or expenses. Past performance is not indicative of future results.

Be So Good

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Jamie Kertis, AIF®, QKAjamie kertis headshot
Retirement Plan Specialist
Grinkmeyer Leonard Financial
1950 Stonegate Drive / Suite 275 /Birmingham, AL 35242
Office: 205.970.9088 / Toll-Free: 866.695.5162
www.grinkmeyerleonard.com

Contact Jamie

Follow Jamie on LinkedIn

Follow Jamie’s Blog