Second, Loring Ward chooses portfolios using DFA funds and SA Funds.
These are the 6 risk-based portfolios that we will provide standard with each 401k or other defined contribution plan. [Read off the portfolios.] These portfolios are based on Loring Ward’s Global Portfolio series. These allocations are the same whether the portfolios are built using DFA funds or SA Funds.
The efficient markets hypothesis implies that no active investor will consistently beat the market over long periods of time, except by chance. Yet active managers test the hypothesis every day through their efforts to pick stocks and time markets. The evidence shows that their efforts are not worth the high cost borne by investors.This slide displays the percentage of actively managed public equity funds that failed to outperform their respective market benchmarks for each major fund category for the five-year period ending June 2009. None of the fund categories beat its index as a group, and four of the seven categories had at least a 70% failure rate. The emerging markets manager category had a 90% failure rate. This is consistent with research, which shows that, as a group, active managers underperform the market by an amount equivalent to their average fees and expenses.
Research by Eugene Fama and other financial academics has offered evidence that the bond markets are efficient and that interest rates and bond prices do not move predictably. This appears to be the case with all types of issues, from short-term government instruments to long-term corporate bonds. This slide illustrates the formidable challenge that active bond managers face. The graph shows the percentage of active fixed income funds that failed to beat the market index in each category over the five-year period ending June 2009. All fund categories experienced at least a 90% failure rate—and three of the categories had no manager that beat the benchmark. This is consistent with financial theory and research, which propose that active managers cannot outperform the market as a group, particularly after accounting for management fees, trading costs, and other expenses.Market efficiency is a major reason why actively managed fixed income strategies do not outperform their respective benchmarks. Investors who want to capture market returns in the fixed income universe may be hard-pressed to identify an active strategy that shows any long-term promise of success.
Speaker notes:Note: this is from Congress.
Speaker notes: This is part of the recent Congressional hearing on 401(k) fees.
Speaker Notes:A successful retirement plan is a puzzle that must be carefully pieced together. All pieces are important: experienced advisors, education to the company and the employees, exclusive investments, fully diversified portfolios, service and plan management and recordkeeping. We have already put these pieces together in a way that can be used for your plan.
Current State of The 401k Market
Current State of the 401(k) Market<br /> -It’s a tough time to be a fiduciary <br />January 6, 2011<br />Presented by<br />Peter S. AnastasianManaging Director – CJM Fiscal Management<br />email@example.com<br />Charles MassimoPresident – CJM Fiscal Managementcharlie@cjmfiscal.com<br />Twitter: @CJMFiscal<br />
The Problem- It’s a Tough Time To Be A Fiduciary<br />Pension law requires the fees for a 401(k) plan to be “reasonable” by service provider.<br />
It’s A Tough Time To Be A Fiduciary<br />“Small 401(k) Plans Often Pay Big Fees”<br />Wall Street Journal<br />August 3, 2009<br />“ Many small-business workers and <br />employers are unaware of the magnitude <br />of those charges.”<br />
Eleanor Laise, "Earlier Retirement: Beating Back High Fees," Wall Street Journal, March 6, 2010.<br />It’s A Tough Time To Be A Fiduciary<br />Trend Toward Transparency and Lower Fees<br />Wall Street Journal<br /> March 6, 2010<br />“. . . [courts recently] seem to be suggesting there are conflicts beneath the surface that need to be made more transparent . . .”<br />
It’s A Tough Time To Be A Fiduciary<br />Employee Allegations of Excessive 401(k) Fees Gain Ground<br />July 29, 2010<br />“. . . The Edison case is one of more than two dozen lawsuits filed against U.S. employers in recent years. The suits allege that companies allowed 401(k) providers to stuff the plans with high-cost investments in exchange for reducing the administrative costs paid by the employers themselves. . . .”<br />“. . . It's frustrating and disappointing that you expect to be treated honestly and fairly, and when you find out that you're not you almost feel cheated," said Suhadolc, a former maintenance mechanic at an Edison subsidiary in Illinois . . .”<br />In the Edison case, Judge Wilson ruled that the company should have offered employees less costly "institutional" shares of the mutual funds in its plan rather than the normal "retail" shares available to regular investors.<br />Employee Allegations of Excessive 401(k) Fees Gain Ground, Los Angeles Time, July 29, 2010<br />
It’s A Tough Time To Be A Fiduciary<br />Due to “unscrupulous practices” litigation <br />pressure is greater than ever before.<br /><ul><li>30 MAJOR fee cases have been filed in the courts.
The Wal-Mart fee case has been sent back to the courts for review.
The recent Caterpillar case was settled for $16 million dollars.</li></li></ul><li>It’s A Tough Time To Be A Fiduciary<br />The impact per one prominent ERISA attorney:<br /> Know what your fees are<br /> Compare them to benchmarks<br /> Monitor on an ongoing basis<br /> Make sure you have real documentation<br /> Hire Third-Parties for an independent review<br /> Have a fiduciary manual<br />$16 million Settlement paid to 401(k) participants<br />Marcia Wagner, Plan Sponsor interview, December 2009<br />
It’s A Tough Time To Be A Fiduciary<br />As a result, Washington is responding:<br />Department of Labor Regulation 408(b)(2)- Effective 7/2011<br /><ul><li>Purpose is to provide fiduciaries with the information they need to fulfill their mandate under ERISA 404(a)(1) regarding reasonableness of fees.
It requires disclosures in writing of information relating to fees, all direct and indirect compensation, and potential conflicts of interest and their status as an advisor or fiduciary.
The regulation would apply to all Covered Service Providers (CSP) that receive at least $1,000 in direct or indirect compensation. </li></li></ul><li>It’s A Tough Time To Be A Fiduciary<br />Compensation: There are four types of compensation that a CSP must disclose “A description of….”:<br /> all reasonably expected direct compensation in aggregate OR by service.<br /> all reasonably expected indirect compensation including the identification of the services and the payer of the indirect compensation.<br /> any compensation that will be paid among related parties if it is set on a transaction basis (e.g. commissions, soft dollars, finder’s fees or other fees based on business placed or retained) or is charged against plan assets (e.g. 12b-1 fees) including identification of the services and the payer of such compensation. <br /> any compensation received in connection with the termination of the arrangement<br />
It’s A Tough Time To Be A Fiduciary<br /> However, that just because a contract or arrangement is not covered by this regulation, those contracts or arrangements still have to be reasonable. This “obligates plan fiduciaries to obtain and carefully consider information necessary to assess…the reasonableness of the fees and expenses being paid for such services, and the potential conflicts of interest that might affect the quality of the provided services.”<br />
How To Reduce Fiduciary Exposure While Creating A More Successful Investment Experience for Participants:<br />Delegate fiduciary responsibility away. 3(21) vs. 3(38)<br />Provide prudent portfolios which adopt a passive approach.<br />Have complete fee transparency.<br />Offer education and professional advice.<br />Maximize plan design.<br />
Fiduciary ResponsibilitiesRecap of Key Principles <br />The law (ERISA) focuses primarily on process, not results.<br /> Fiduciary decisions must be made with only the participant’s interest in mind.<br />Fiduciaries may not have conflicts of interests.<br /> Fiduciaries must be knowledgeable regarding their areas of responsibility or hire independent professional advisors.<br /> ERISA has provisions for transfer and delegation of certain responsibilities and attendant liabilities to qualified third parties.<br />
<ul><li>A fiduciary who breaches any of the fiduciary duties has personal liability to restore to the plan any losses that result from the breach and to restore any profits acquired through the fiduciary’s use of plan assets.
Co-fiduciaries may also be liable for “knowing participation,” enabling other fiduciaries to commit a breach, or knowledge of a breach, without taking efforts to remedy the breach.</li></ul>Implications of Fiduciary RolesFiduciary Liability for Breach of Duties<br />
Fiduciary Responsibility and Financial Advisors<br />ERISA § 3(38) Fiduciary<br />ERISA § 3(21) Fiduciary (Limited Scope)<br />Non-Fiduciary<br /><ul><li>Has authority to render investment advice to plan sponsor for compensation with respect to plan assets.
No explicit acknowledgement of fiduciary responsibility with respect to the plan or its participants.
Agrees to adhere to a fiduciary standard and is thereby subject to sole interest and exclusive purpose responsibilities.</li></ul>Broadly speaking, advisors may service 401(k) plans while assuming varying levels of fiduciary responsibility.<br />
Adopt A Passive Approach<br />“The greater a trustee’s departure from one of the valid passive strategies, the greater it is the likely to be the burden of justification and also of continuous monitoring.”<br />The Prudent Investor Act <br />
Adopt A Passive Approach<br />“Index funds are the only rational alternative for almost all mutual fund investors.” <br />“A growing number of big investors are concluding that stock & bond pickers failed to add any value during market turmoil and shifting to index funds…”<br /> New York Times, July 13, 2008<br />“The best course for the average investor is to buy and hold an index fund for the long term.”<br />Wall Street Journal, June 22, 2009<br />New York Times, March 9, 2008<br />
Adopt A Passive Approach<br />Percentage of Active Public Equity Funds That Failed to Beat the IndexJuly 2004-June 2009<br />% of Active Funds That Failed to Outperform Benchmark<br />US Large Cap<br />US Mid Cap<br />US Small Cap<br />Global<br />International<br />International Small<br />Emerging Markets<br />Equity Fund Category<br />Source: Standard & Poor’s Indices Versus Active Funds Scorecard, August 20, 2009. Index used for comparison: US Large Cap—S&P 500 Index; US Mid Cap—S&P MidCap 400 Index; US Small Cap—S&P SmallCap 600 Index; Global Funds—S&P Global 1200 Index; International—S&P 700 Index; International Small—S&P Developed ex. US SmallCap Index; Emerging Markets—S&P IFCI Composite. Data for the SPIVA study is from the CRSP Survivor-Bias-Free US Mutual Fund Database.<br />
Adopt A Passive Approach<br />Percentage of Active Fixed Income Funds That Failed to Beat the IndexJuly 2004-June 2009<br />% of Active Funds That Failed to Outperform Benchmark<br />Government Long<br />Government Intermediate<br />Government Short<br />Investment-Grade Long<br />Investment-Grade Intermediate<br />Investment-Grade Short<br />National Muni<br />CA Muni<br />Fixed Income Category<br />Source: Standard & Poor’s Indices Versus Active Funds Scorecard, August 20, 2009. Index used for comparison: Government Long—Barclays Capital US Long Government Index; Government Intermediate—Barclays Capital US Intermediate Government Index; Government Short—Barclays Capital US 1-3 Year Government Index; Investment Grade Long—Barclays Capital US Long Government/Credit; Investment Grade Intermediate—Barclays Capital US Intermediate Government/Credit; Investment Grade Short—Barclays Capital US 1-3 Year Government/Credit; National Muni—S&P National Municipal Bond Index; CA Muni—S&P California Municipal Bond Index. Data for the SPIVA study is from the CRSP Survivor-Bias-Free US Mutual Fund Database. Barclays Capital data, formerly Lehman Brothers, provided by Barclays Bank PLC. <br />
Mutual Fund Performance <br />Compared to the Market <br />32 Years (1977 – 2009) <br />0.6% Outperformed the market<br />That’s only 1 in 166!<br />Barras, Laurent, Scaillet , O. and Wermers, Russ R., "False Discoveries in Mutual Fund Performance: Measuring Luck in Estimated Alphas" (May 2008). Robert H. Smith School Research Paper No. RHS 06-043 http://ssrn.com/abstract=869748<br />Adopt A Passive Approach<br />
Adopt A Passive Approach<br />Professionally managed portfolios result in higher rates of return for 401(k) participants<br />Annual Rate of Return in 401(k) account <br />Source: Schwab press release dated Nov. 28, 2007, titled “New Schwab Data indicates Use of Advice and Professionally-Managed Portfolios Results in Higher Rate of Return for 401(k) Participants”<br />
Offer Fee Transparency<br />Jerry was told by his employer, Elcon Associates that its total 401(k) fees were only 0.10%. After 12 years of questioning, Jerry finally learned that he pays at least seven other charges for his John Hancock plan, including:<br />Disclosed Fees 0.10%<br />Mutual fund providers 0.50%<br />John Hancock Administration 1.32%<br />John Hancock Advisory Fee 0.75%<br />Commissions to traders 0.76%<br />Jerry’s Total Fees: Over 3.5%<br />As seen in Bloomberg Television’s Emmy Award winning documentary. <br /><br />Hidden Fee<br /><br />Hidden Fee<br />Hidden Fee<br /><br />Hidden Fee<br /><br />Source: Darrell Preston, Bloomberg Markets March 2008<br />
Offer Fee Transparency<br />0.29%<br />3-4% Total <br />+/- 1.70% Total <br />0.38%<br />0.60%<br />Our Plan <br />Typical Plan <br />
Offer Fee Transparency<br />“Do You Know How Much in Fees and Expenses you are Paying for your 401(k) Plan?” <br />YES<br />17%<br />NO 83%<br />Sources: http://edlabor.house.gov/issues/401kfees.shtml; AARP, “401(k) Participants’ Awareness and Understanding of Fees” July 2007<br />
Offer Fee Transparency<br />$3,000 per year invested into retirement plan- the 2% difference <br />Difference<br />$260,310<br />Interest compounded annually <br />
Offer Fee Transparency<br />$260,310 Difference is . . <br />Assume 5% Annual Withdrawal Rate Upon for 20 Years Upon Retirement:<br />$27,453 more per year! <br />
Fees May Delay Retirement<br />Additional Months Required to work to receive <br />the same monthly retirement benefit* <br />64 Months <br />Additional Months <br />48 Months <br />32 Months <br />16 Months <br />Annual Fee Charged** <br />*Inflation adjusted. <br />** As a share of assets (in percent of assets) <br />Source: Center for American Progress, “Building 401(k) Wealth One Percent at a Time”; from the April 16, 2008 Congressional hearing.<br />
Offer Fee Transparency<br />“Employers struggle to understand how much their 401(k) plan costs. . . Our experience has shown the low cost plans cost 3% of plan assets annually. More expensive plans can cost as much as 5% per year. This is substantially more than what most employers understand their costs to be.”<br />‐ John Bogle, Founder of Vanguard<br />http://www.401khelpcenter.com/mh/MH_Uncovering_401k_Fees.html and http://www.forbes.com/business/services/feeds/ap/2006/12/11/ap3243156.html<br />
Educate<br />Advise<br />Monitor<br />For Advisor Use Only – Not for Public Distribution <br />
Percentage of employers who identify offering advice as a top priority. <br />82%<br />Source: Hewitt Associates, 2002 survey; 401khelpcenter.com<br />
Many workers continue to be unaware of how much <br />they need to save for retirement. Less than half of workers <br />(46%) have tried to calculate how much money they need <br />to save to retire comfortably. Of those who did, 44% relied <br />on guess work rather than a detailed review or professional <br />advice.<br />BRI 20th Retirement Confidence Survey<br />
Yet only about half of plan sponsors now offer <br />professional advice- up from 17% ten year ago.<br />Source: Hewitt 2010<br />
Putting the puzzle together <br />Successful Retirement <br />Plan<br />
Independent Fiduciary Endorsement<br /><ul><li>Endorsed by Matthew D. Hutcheson, Independent Plan Fiduciary.
Mr. Hutcheson has testified several times before Congress regarding hidden fees in 401(k) plans.</li></li></ul><li>Thank You<br />www.cjmFiscal.com/free-analysis<br />Blog: www.LongIslandPlan.com<br />Peter S. AnastasianManaging Director – CJM Fiscal Management<br />firstname.lastname@example.org<br />Charles MassimoPresident – CJM Fiscal Managementcharlie@cjmfiscal.com<br />Twitter: @CJMFiscal<br />