With
the advent of new database technology and the widespread accessibility
to the internet, the 401(k)
Plan marketplace is experiencing a rapid change. The dramatic
reductions in costs make the plans more accessible to smaller
companies and significantly enhance the total returns of existing
retirement plans. The internet allows for improved investment
education with new tools to increase employee participation in
401(k) Plans.
To compare the old and new plans, see the table below.
Accounting
Old
Method
New
Method
Balance
Forward: 401(k) balances reported quarterly. This has been
the industry standard. Most old plans and many of the new smaller
plans are still using this expensive and labor intensive methodology.
Daily
Valuations: Daily valuations have become a requirement of
most new 401(k) Plans. With this new internet or telephone based
technology, participants can get daily information and trade their
account as often as they wish. Although this is a valuable tool,
the active trading of the account will probably reduce total returns.
Education
and Communication
Old
Method
New
Method
Paper
Based Delivery: Prior to the wide accessibility of the internet,
very expensive brochures, manuals, payroll stuffers and various
paper forms were used to communicate to employees. The high
cost of these printed materials and postage were paid for by
the company and/or the employees. These costs, along with inadequate
investment advice, make it very difficult to even earn a positive
return on investment, as you will see in the cost comparison
table on the next page.
Internet
Delivery: Since all employees can access the internet at home
or at work, it is now feasible to provide all information relating
to the 401k plan over the internet. Participants can log on to
a secure web site, enroll in the plan, take risk capacity surveys,
choose an asset allocation, and view their daily balances. They
can also review educational videos, dynamic charts and other materials,
and read the plan document details. Since this can be provided
at a fraction of the cost of printed materials and be frequently
updated, it has become the preferred method of communication.
Structure
Old
Method
New
Method
Proprietary
Bundled Service: Because of the cost-intensive nature of the
"old-school" 401(k) service methods, single providers
such as Fidelity, Vanguard, The Principal, Manulife, etc., had
an upper hand in the marketing of 401(k) plans. They were the
only firms who could spread the costs over their very large asset
bases.
Open
Architecture: The new web-based database technology make 401(k)
Plan services flexible and immediately available to thousands
of employees. This also allows access to thousands of investment
options rather than those offered from a single source fund family
or an insurance company. Institutional style index funds from
DFA have recently been made available for 401(k) plans. These
are the number-one
rated mutual funds.
Investments
Old
Method
New
Method
High
fee, actively managed funds with participants "running wild"
with their choices.
"If
we could choose only one family of funds for the ideal 401(k)
plan, it would be Dimensional Fund Advisors. We believe DFA's
institutional index funds are the best, and employees whose
plans include them are fortunate...In 2001, a portfolio of
DFA funds weighted equally among the asset classes we listed
above would have appreciated by 1 percent. Doesn't seem like
much but it's much better than the 12 percent loss in the
Standard & Poor's 500 Index and the 23 percent decline
by the average large-company growth fund." - Paul Merriman,
CBS Marketwatch, A world-class menu of 401(k) choices, Jan
16, 2002
[In
the article,] he continues to advocate ending the current
brand recognition contest and replacing competing fund choices
with pre-built portfolios at different levels of risk. Those
portfolios, in turn, would be constructed with large doses
of index and enhanced index funds combined with smaller doses
of proven active managers. The combination would result in
a dramatic cost and risk reduction -- and make our largest
and most successful savings vehicle less of a lottery. - by
Scott Burns, "What
Your 401(k) May Look Like."
Both referring to a paper by M. Barton Waring, "It is
11pm, Do You Know Where Your Employees Assets Are?" Call
us toll free at 888-643-3133 to obtain a copy.
"Low-cost indexing is the magic ingredient to creating
a model 401(k) program." Lynn O'Shaunessy, What’s
wrong with your 401(k) -- and how to fix it. www.msn.com,
4/1/02
"The
typical fund company services [401k plan] participants in
the same way that Baby Face Nelson serviced banks." -
William Bernstein, Riding
for a Fall, The 401(k) is likely to turn out to be a defined-chaos
retirement plan.
An
examination of plans sponsored by five leading financial
services firms reveals that from 1995 through 1998,
none had returns that matched a simple index of 60 percent
stocks and 40 percent bonds. Although these companies offer
investment advice to the public, the investment choices
of their own employees underperformed the market index by
3.2 to 10.5 percentage points. Recommendation: Premixed Portfolios and Professionally
Directed Investments. Since index funds and the
managers of defined benefit pension plans have historically
produced higher yields on investments, companies adopting
the American Freedom 401(k) plan would have to agree to
include in participants' options premixed efficient
portfolios - ones that give the maximum rate of return
at different risk levels - or a professionally directed
investment option or both.
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Past performance does n
Administration
12-Step Overview
"If
we could choose only one family of funds for the ideal 401(k)
plan, it would be Dimensional Fund Advisors. We believe DFA's
institutional index funds are the best, and employees whose
plans include them are fortunate...In 2001, a portfolio of
DFA funds weighted equally among the asset classes we listed
above would have appreciated by 1 percent. Doesn't seem like
much but it's much better than the 12 percent loss in the
Standard & Poor's 500 Index and the 23 percent decline
by the average large-company growth fund." - Paul Merriman,
CBS Marketwatch, A world-class menu of 401(k) choices, Jan
16, 2002
[In
the article,] he continues to advocate ending the current
brand recognition contest and replacing competing fund choices
with pre-built portfolios at different levels of risk. Those
portfolios, in turn, would be constructed with large doses
of index and enhanced index funds combined with smaller doses
of proven active managers. The combination would result in
a dramatic cost and risk reduction -- and make our largest
and most successful savings vehicle less of a lottery. - by
Scott Burns, "
"The
typical fund company services [401k plan] participants in
the same way that Baby Face Nelson serviced banks." -
William Bernstein, 
