Precept Employee Benefits Blog» Bernie Wong – Precept Employee Benefits Blog

Dollar Cost Averaging in Practice

Bernie Wong — Mon, 03 Aug 2009 16:23:16 +0000

Do you believe in dollar cost averaging to minimize market risk while maximizing potential returns?

For those of you who aren’t familiar with the concept, simply stated, dollar cost averaging is consistent investment of set amount of money in periodic intervals to reduce market risk. Instead of investing a lump sum trying to time the market, dollar cost averaging spreads out the investments over time and minimizes the negative impact of market fluctuations while taking advantage of the increase in purchase power during down market cycles.

With the above in mind, Precept RPS has consistently included the topic of dollar cost averaging at every employee educational meeting. However, whenever dollar cost averaging is mentioned or explained, plan participants usually give a look of skepticism or disbelief. They have a difficult time believing that there’s a potential for investment gain even when the market is substantially down for the year.

To help prove that this concept applies to everyday investors and especially to 401(k) participants who practice dollar cost averaging through payroll deductions, I conducted a little experiment. I have been tracking 2 mutual funds for the past 11 months, the Schwab S&P 500 Index E Share fund (SWPEX) and the Fidelity Spartan Ext. Market Index Inv fund (FSEMX). On September 11th, 2008, just prior to the market crash, a share of the Schwab S&P 500 Index fund was $18.98 and a share of the Fidelity Spartan Ext. Market fund was $36.55. However on July 22nd, 2009, each respective share price was $14.87 and $25.56. That is a decrease in price of 21.65% and 21.74%! Yet, as the cliché goes, it’s all about the journey, not the end results. What if, starting in September 2008 until July 2009, I invested $100 in each fund on the 11th and 22nd day of the month? How much would I gain or lose?

It may be shocking, but even though the Schwab S&P 500 fund was down about 25% in that time period, through dollar cost averaging, I was up 8.26%. Similarly, for the Fidelity Spartan Ext. Market fund which was down 28.02% for that time period, I was up 12.78%. All I did was automatically invest $100 every 11th and 22nd day of the month. This shows the advantage of practicing dollar cost averaging by increasing your purchasing power during down market and realizing positive returns during the recovery period.

Now, do not use this example as a guarantee that you’ll always realize investment gains. The purpose of dollar cost averaging is to minimize risk and maximize your potential for investment returns Instead of guessing when the market is on the rise or fall; this steady approach incurs all the highs and lows in order to balance out the risk. As we move through this volatile market period, plan participants will realize that dollar cost averaging is applicable in theory and in practice.

For more information:

Dollar Cost Averaging: A Technique that Drastically Reduces Market Risk

Does Dollar Cost Averaging Work?

SEC/DoL Target Date Hearing has finally come to Pass

Bernie Wong — Tue, 23 Jun 2009 22:43:45 +0000

In the last Retirement blog, we posted that the SEC and DOL were set to hold a hearing evaluating target date funds on June 18^th. While there were many who surmised a potential and seismic shift in the retirement world, what came out of the hearing was much more subdued. The hearing consisted of nine panels, over 40 witnesses and multiple testimonies. As Rebecca Moore of planadviser.com stated, the most common theme of the day was that “target dates are useful, but flawed”.

Target date funds are viable options for plan participants with limited time to research plan fund options or limited investment knowledge to select individual funds. Target date funds offer a simpler solution of using a glide-path asset allocation strategy which matches up to the participant’s target retirement date. However, the hearing showed that is much more difficult in practice. Joseph C. Nagengast, of Target-date Analytics said, “There is some theoretical rationale for employing a glide path throughout the accumulation phase. No credible rationale has ever been proffered for using a glide path in the distribution phase”. However one point was made clear, there should be no regulations on how one invests in target date funds. “In the 70-year history of mutual fund regulation, the government has never regulated the investment choices of mutual funds. Nor should it start now,” said ICI General Counsel Karrie McMillan. The largest fear of placing restrictions on investment choices for target date funds is that it would cripple the fund manager’s ability to rebound from losses, as well as hinder the fund’s long term objectives.

While the hearing did touch on what’s wrong, many testimonials did mention ways to help improve target date funds. Nagengast suggested a need to focus on “the name of each fund (that) must bear some relationship to the way the fund is managed, that is, its glide path” and how “the glide path must be designed to provide for a predominance of asset preservation as the target nears and arrives”. Other suggestions include disqualifying target date funds as a Qualified Default Investment Alternative, offering full disclosure, education programs, and education targeting soon-to-be retiree programs. In the end, the DOL and SEC will gather all the data to try and address any future regulations. However, by the sound of it, what was once thought as a doomsday event for target date funds, now seems to be much-ado-about-nothing.

For more information:

Missing the Targets by Steven Syre (Source)

Financial Planners urge Fedl Standard for Target Date Funds by Darrell A Hughes (Source)

U.S. Urged not to Tamper with Target Date Funds by James Pethokoukis (Source)

Target-Dates Useful but Flawed, Witness Tell SEC and DoL by Rebecca Moore (Source)

EBSA and SEC to Hold Hearing Regarding Target Date Funds

Bernie Wong — Mon, 08 Jun 2009 08:36:14 +0000

On June 18th, the Employee Benefits Security Administration and the SEC will hold a one day hearing that focuses on target date funds. According to the agency, “the hearing will focus generally on issues facing investors in these types of products, and will explore topics such as portfolio composition, risk, and disclosure.”

The hearing is partly a response to the performance of the 2000 – 2010 target date funds. As of 3/31/09, the average 1 year performance for 2000 – 2010 target date funds was down 24.67%. In theory, the composition of the funds should be more conservative the closer to the target retirement date. This hearing will address how and why target date funds have such high average negative returns.

In addition, the hearing is also a follow up from last February where the Department of Labor issued a regulation from last year that allowed target date funds to be used as the qualified default investment option (QDIA) for plans. However, the hearing did not address any “requirements regarding the composition of target-date funds and the appropriate ratio of stocks and bonds as the fund nears its target”. What is to stop a manager from investing 80% in equities and only 20% in bonds for a 2010 target date fund? Hopefully what comes out from the hearings are guidelines for plan sponsors to review their target date funds and see if they fit the plan’s goals.

For more information, please go to http://www.planadviser.com/compliance/article.php/4333

Why Money Market Funds can Yield Negative Returns

Bernie Wong — Fri, 13 Mar 2009 16:10:18 +0000

It is tough to figure out what will happen with the market in this volatile period. Last week, the Dow Jones Industrial Average and the S&P 500 were sinking lower and lower only to rebound this week with 4 straight days of gains. In such times, many plan participants have been forgoing placing their money in the tumultuous equity market and instead place their money in the conservative and “steady” money market funds. Recently, however, even the money market funds are not immune to financial losses for plan participants as money market funds are treading closer to the negative, and some are already there. How can this be?

According to Christopher Condon of Bloomberg.com, money market funds that focus on the U.S. Treasuries are susceptible since the yields are so low and cannot cover plan expenses. As of December 10^th, 2008, “of the 500 largest U.S. money-market funds, 41 have daily annualized yields at or less than 0.05%, including four funds with zero yield”.

To further exemplify their point, the category average of taxable money market funds according to Morningstar.com is:

Taxable Money Market	1 month	3 month	YTD
Return %	0.05	0.22	0.05

*as of 2/28/08

If plan participants are wondering why their money market account is losing money, explain to them that the combination of low yields and plan expenses could result in negative returns. Also, this might be a stark reminder that no matter how safe an investment is, participants must also be educated and do research. As this troubling time tells us, there are no completely safe investments.

For more information, please read:

Christopher Condon’s article: http://www.bloomberg.com/apps/news?pid=20601087&sid=axHG.5Dvl3P4&refer=home

Or read Laura Bruce’s article:

http://www.bankrate.com/brm/news/investing/20090203-money-market-funds-low-yields-a1.asp

What not to do as a Plan Fiduciary

Bernie Wong — Fri, 06 Mar 2009 15:59:09 +0000

About a month ago, U.S. District Judge Patrick J. Duggan ruled in favor of the plaintiff in a case regarding plan contributions. According to Fred Schneyer at planadviser.com, the plaintiff, Paul Safran, sued his former employer LDS Contractors, Inc., owned by Frank Donagrandi, because Donagrandi “misled participants into thinking LDS was making its required annual contributions despite his responsibilities as a plan fiduciary”. The court found that “LDS’s business began to decline and no contributions were made to the plan between 2002 and 2006. The court noted that Donagrandi used funds from the plan in his own individual account to pay LDS debts, and that the unpaid contributions were listed as unfunded liabilities on LDS’s books”. Obviously, Donagrandi did not fulfill his ERISA fiduciary responsibility and was ruled to pay 10% of Safran’s salary to a defined contribution plan, which is approximately $24,900, and pay Safran’s attorneys’ fees.

This event is a good reminder on the importance of fulfilling plan fiduciary responsibilities. According to the Department of Labor, fiduciary responsibilities include:

Acting solely in the interest of plan participants and their beneficiaries and with the exclusive purpose of providing benefits to them
Carrying out their duties prudently
Following the plan documents (unless inconsistent with ERISA)
Diversifying plan investments; and
Paying only reasonable plan expenses

Plan fiduciaries should not take their duties lightly, especially in turbulent times when participants are extremely sensitive about their retirement accounts. Here are some tips to help limit plan fiduciary liabilities:

Follow your Plan’s Investment Policy Statement
- An investment policy statement is essential for the proper operation of a plan and the proper fulfillment of the fiduciary duties for selection and monitoring of investments
Remember to document everything
- ERISA is concerned with a prudent process and the best way to demonstrate this is to carefully document your actions and decisions.
Reinforce basic investment principals
- Don’t forget about the value of diversification and investing for long term gains
Remember to keep plan participants informed
- With the uncertainties in the market, participants probably have a lot of questions regarding their investments. It is very important to communicate with participants. Ask your vendor for some materials that can help explain the current market to plan participants and their options in such volatile times.

For more information regarding the Safran v. Donagrandi case, please go to http://www.planadviser.com/compliance/article.php/3630

For more information regarding the DOL Fiduciary Guidelines, please go to http://www.dol.gov/ebsa/publications/fiduciaryresponsibility.html

Fidelity Bond vs. Fiduciary Liability Insurance

Bernie Wong — Fri, 27 Feb 2009 13:21:20 +0000

Fidelity Bond vs. Fiduciary Liability Insurance by Janelle Sotelo, Account Manager, Precept RPS

In today’s ever-changing world of the retirement plan market, plan sponsors are asking if they need a Fidelity Bond or Fiduciary Insurance or both. The two may sound similar but there are big differences between them.

A Fidelity Bond helps make a plan whole from losses resulting from dishonest or fraudulent acts by employees in the handling of plan participants’ money or securities. All qualified retirement plans must obtain an ERISA fidelity bond.

On the other hand, fiduciary liability insurance protects plan fiduciaries from breaches of their fiduciary duty under ERISA.

Fidelity Bond

The Pension Reform Act of 1974 (more commonly known as ERISA – Employee Retirement Income Security Act) states that the funds of pension or profit sharing plans must post a bond for 10 percent of the amount handled. As an example, a 401(k) Plan with $5 million in funds must post a bond of $500,000. ERISA required bond coverage is limited to protection against loss through fraud or dishonesty. Bond terms may exceed one year, which may result in having to adjust the amount at the beginning of each plan year to meet the 10 percent of plan asset minimum. The typical fidelity bond coverage is for three years.

Commercial Blanket Fidelity Bond Rates for Pension Plan Bonds

Bond Amount	3 – Year Prepaid	Bond Amount	3 – Year Prepaid
$25,000	$129	$200,000	$303
$50,000	$179	$250,000	$327
$75,000	$221	$300,000	$367
$100,000	$250	$350,000	$387
$150,000	$277	$400,000	$407
$175,000	$290	$500,000*	$450

*Maximum bond amount (regardless of Plan asset size).

For plan years beginning after January 1, 2007, the Pension Protection Act of 2006 (PPA) increases the maximum fidelity bond amount to $1,000,000 for plans that hold company stock.

What are the consequences if the DOL discovers a plan is not covered by a fidelity bond? The DOL alleging breach of the fiduciary of the plan can ask the court to:

· Order the owner to obtain the bond,

· Permanently bar him or her from serving as an ERISA plan fiduciary,

· Remove the current plan administrator,

· Appoint an independent trustee, or

· Impose penalties

Fiduciary Insurance

As a 401(k) plan sponsor, you have fiduciary responsibilities, duties and obligations imposed upon you by ERISA. According to ERISA, plan fiduciaries must act solely in the interest of the participants and beneficiaries of the plan. ERISA also mandated that fiduciaries may be personally liable for breach of certain responsibilities imposed upon them under the law. With the number of ERISA Civil Cases on the rise, adding fiduciary insurance coverage may be an important step for all plans to consider.

Fiduciary liability insurance provides protection to the sponsor employer and its officers, directors, and employees from their liability exposures arising from ERISA and the common and statutory law. Below is a chart on average premium rates:

Plan assets	Avg Premium*
$1,000,000 – $ 2,000,000	$800 – $1,000
$2,000,000 – $ 5,000,000	$1,000 – $1,200
$5,000,000 – $10,000,000	$1,300 – $2,000

*Premium based on $1,000,000 in coverage amounts.

(Source: naplia.com)

What Does 2009 Hold for Retirement Plans?

Bernie Wong — Fri, 06 Feb 2009 15:21:27 +0000

Last week, Fidelity posted their survey results regarding how retirement plans fared in 2008. Now in the spirit of continuality, Callan Associates released their survey on what to expect in 2009. Fred Schneyer of Planadviser.com analyzed the Callan report and found some interesting findings.

One of the most interesting themes of the report is that plan sponsors are planning to be more pro-active in 2009. Schneyer states that about 67% intend to provide more education and communication in 2009:

“95% will increase investment communication.
71% will increase communication around participation.
64% will increase communication about retirement income adequacy.”

Another area of interest for plan sponsors is fund and manager performance. According to the article, 39% made fund changes in 2008 and 44% are expecting to replace a fund for “performance related reasons” in 2009. To increase due-diligence, 76% of sponsors anticipate increasing the number of investment committee meetings. It seems that the volatility of 2008 provided awareness for plan sponsors regarding the importance of fund monitoring.

Lastly, the report presents a somber note that sponsors will also cut back on plan features. 1% of plans state that they will decrease the employer match while “20% of respondents were unsure what steps they might take by the end of 2009”. Also, “few plan sponsors expect to add a Roth contribution, investment advice, automatic enrollment, or contribution escalation to their plans”.

Overall, the Callan Associates survey paints a very active picture of what plan sponsors except to do regarding their retirement plans; they will inform, educate, and monitor their defined contribution plan without over-exerting their capabilities by adding more features.

For more information, please read Fred Schneyer’s article:

http://www.planadviser.com/article.php/3620

Recent Fidelity Survey Says 401(k) Balances Down 27%, Contributions Up

Bernie Wong — Fri, 30 Jan 2009 16:16:48 +0000

Fidelity released their findings from a survey of 17,095 corporate 401(k) plans it administers with some startling and surprising results. The most significant (or at least, most publicized) finding was that participant balances fell an average of 27%. According to Tiffany Hsu of the LA Times, this is the first drop in 5 years. Specifically, “The average account balance fell to $50,200 last year, from $69,200 the year before, the survey found. In October, the Congressional Budget Office estimated that workers collectively had lost $2 trillion in retirement savings over the previous 15 months”.

Nevertheless, the Fidelity survey was not all negative news. Employee Contributions were slightly up in 2008. Jeff Plungis of Bloomberg.com states that “employees saved an average of $5,600 in 2008, slightly higher than in 2007”. Also, 401(k) participants are diversifying more with their investments. Rebecca Moore of Planadviser.com says that in 2007, 37% of employees invested only in equities; however, in 2008, that number is now 16%. That’s over a 50% drop. Employers have also encouraged diversification of plan investments. The survey states that 60% of plans were using the lifecycle funds as their default option, compared to only 38% at the end of 2007. It seems that in 2008, both the employer and the employee recognize the importance of both contributing and diversification.

While the 27% drop seems like the major headliner, there are many encouraging findings in the Fidelity survey. Other news, such as employers increasing their auto-enrollment feature from 11% in 2007 to 18% in 2008 and that fewer than 1% of companies either suspended or reduced their matching contributions, show that even though they are living in harsh economic times, employees and employers still recognize the need to save for the future.

For more information, please read the following articles:

Rebecca Moore – Planadviser http://www.planadviser.com/research/article.php/3593 (Source)

Tiffany Hsu – LA Times http://www.latimes.com/business/la-fi-retire29-2009jan29,0,53935.story (Source)

Jeff Plungis – Bloomberg http://www.bloomberg.com/apps/news?pid=20601213&sid=acOyjUGFgM30&refer=home (Source)

In Tough Economic Times, More Companies are Cutting 401(k) Match Feature

Bernie Wong — Fri, 23 Jan 2009 16:45:05 +0000

Cash-strapped companies are looking for ways to reduce expenses and unfortunately, many of them are either cutting or getting rid of their 401(k) match incentive. According to an article written by Mary Williams Walsh and Tara Siegel Bernard of the NY Times, companies such as FedEx, Eastman Kodak, Motorola, General Motors, and Resorts International have cut or froze their matching contributions since September. Specifically, companies in the auto-industry, health care, newspaper, resorts, and casinos are most at-risk to cut not only their retirement, but all benefits.

Even though the reduction of matching contributions will greatly affect the long-term growth of retirement plans, surveys has shown little change in employee contributions. Janet Kidd Stewart’s article in the Chicago Tribune states that “contributions rates to 401(k) plans dropped by less than half of 1 percentage point” in 2008. Walsh and Siegel’s article goes a step further saying, “study after study has shown that employee procrastinate when it comes to retirement plan chores, and in this case the inertia may work, unwittingly, in their favor”. However, this only applies to people who are currently in the workforce. New employees might feel less of a need to start contributing to a 401(k) plan without a match, which will stunt retirement plan growth. In the end, even if employees are still contributing, the lessening of employer match contributions will greatly affect the long-term savings of retirement plans.

Although companies are cutting the 401(k) matching contributions, they still need to be involved in promoting participation. Employers should still conduct retirement employee educational meetings to show the workforce the benefits of retirement plans even in this troubling economy. Teaching topics such as tax deduction benefits, dollar-cost-averaging, and asset diversification can help employees understand the importance of saving for retirement, in spite of 401(k) matching cuts. Employers, even if they are cutting benefits, must continue to have clear communications with their employees at all times.

For more information please visit the following sites:

http://www.chicagotribune.com/business/yourmoney/chi-ym-journey-0111jan11,0,3226434.story

http://www.nytimes.com/2008/12/21/your-money/401ks-and-similar-plans/21retire.html

Bush Signs Bill that Delays the Required Minimum Distribution Rules

Bernie Wong — Mon, 19 Jan 2009 09:12:08 +0000

In one of his last acts, President George W. Bush signed the Worker, Retiree and Employer Recovery Act (H.R. 7327) on December 23rd, 2008. According to Fred Schneyer from Planadviser.com, one aspect of the measure “suspends for 2009 the requirement that individuals 70 1/2 and older must withdraw a minimum amount from their 401(k) plans or IRAs and that those who do not are subject to a 50% penalty on the amount that should have been withdrawn”.

One of the reasoning for this moratorium was that retirees over the age of 70 1/2 were forced to sell their retirement funds and diminish its value when the market is currently at its lowest in recent history. Schneyer’s article stated that retirees “had the potential to seriously diminish the retirement nest egg” but thanks to the Worker, Retiree and Employer Recovery Act, retirees can have the option to wait to see if the market recovers before selling. The Act goes into effect in 2009 and, as of now, will only be for that one year.

For more information, please read Fred Schneyer’s article which can be found here:
http://www.planadviser.com/compliance/article.php/3398