The Role of Professional Money Management in Retirement Plans

By Toby Pitts

By Toby Pitts

America’s working class is facing a crisis. Long gone are the days of defined benefit plans and guaranteed retirement security. Employees have been left to fend for themselves when it comes to saving for retirement and how to do it.

Armed with a simple 401k menu of various mutual funds and target date funds your employees are often going to their cubicle partner, best friend, brother in law, etc asking for advice on what to invest in and how much. It should be no surprise that mistakes are being made on a grand scale and the complaints to human resources, at least anecdotally, are rolling in along with the lawsuits.

A response to this problem has been the creation of target date funds and plan sponsors are including these options in an effort to address this problem. These funds are a one-stop shop for the plan participants that have a diversified mix of investments held within them that adjust their allocation based on age. These funds follow the old wisdom of moving from equities into fixed income as a person ages. This idea is meant to preserve gains and reduce risk as one nears retirement.

Unfortunately, markets do not care about an individual’s age. Interest rates have been at all time lows for 8 years now and are unlikely to rise to any rate that will provide an income stream anticipated with classical asset allocation models. So while target date funds in concept are a useful response to helping plan participants invest intelligently for retirement, it ultimately is going to leave many people underfunded and unprepared when they reach their golden years.

There has never been a better time to make the argument for professional management in retirement plans. Plan participants are under-educated with little time to spare, markets are in constant flux, and plans now face increased scrutiny and fiduciary responsibilities.

An option that plan sponsors should consider is the model portfolio. Building off the target date model and adding active elements to it help address the problems of target date funds. Model portfolios take into account a participants risk tolerance, need, goals, can be custom tailored and made to adjust to market conditions as well as retirement age.

As time marches on and as your employees realize they aren’t doing enough and don’t know what to do we believe you will see more and more participants asking for professional guidance and management to help them reach retirement goals.

If you’d like to learn more about model portfolios, or how to address other problems within your defined contribution plan please contact us here.

"Carry Nation"

Carrie Nation was the voice for the radical members of the temperance movement in America in the late 19th and early 20th century. In the years since then we have often made fun of her dour demeanor and her bible-thumping, hatchet-swinging attacks on taverns and saloons. At the time, however, she was no joke. 

After starting a small chapter of the Woman’s Christian Temperance Union in Medicine Lodge, Kansas, Carrie Nation change her name to “Carry A. Nation” to signify her commitment to carry our nation out of drunkenness to sobriety.

It didn’t work. Like so many campaigns before the Temperance Union and the years of Prohibition in this country, the attempt to cure alcoholism by commandment or law is rarely effective. In fact, it wasn’t until December 1935 when a young stock manipulator, Bill Wilson, found himself stranded in Ohio and desperate for a drink that the first effective “cure” for alcoholism was developed. 

What made Alcoholics Anonymous so successful? After centuries of telling drinkers they had to stop, AA showed people how to stop. The 12 Steps are not rules, they are a path. No, it doesn’t work for everyone, but far more men and women have gotten sober by following that path than by listening to the dictates of Carry Nation. By now you may be looking up at the top of the page to make sure this has something to do with retirement plans. It does; believe me it does. 

Maybe you’ve read a few of the hundreds, possibly thousands of articles that tell you you’re not saving enough. “The end is near! Start saving today!” 

Ok, got it. Start saving: good idea. In fact, I’ve been thinking it was a good idea for the last 45 years. Yup. I’m going to start saving…first thing tomorrow morning. But they don’t say how. We all know we should save for our retirement, but very few people know how to save for retirement. “It just takes a little self-discipline,” the savers say in an odd echo of the ministrations of the Temperance Union. “You can do it…” But how?

Below are three links to programs that help you stay focused on your financial goals by providing personal support and advice on a daily, weekly or monthly basis. They are past the “why” and “should” of the financial planning process and jump right into the how. Custom built micro-communities supply the support and guidance to each other at every step along the way. Try them. See what you think; think about adding something like this to your employee benefits plan. It may make the difference between wish and reality when that retirement day rolls around.

If you’re a plan administrator you must read this

ERISA §3(38) authorizes the sponsor of a 401(k) plan to hire an investment manager with complete discretion over selecting, monitoring and replacing the Designated Investment Alternatives in that plan. The agreement must in writing and must state explicitly that the investment manager is serving in that capacity in accordance with ERISA §3(38).
The sponsor is still the plan fiduciary and as such is responsible for the selection & oversight of the investment manager. The investment manager, however, assumes the fiduciary responsibility for the plan’s investments.

Many sponsors fail to appreciate the breadth and depth of their responsibility for the plan’s investments when they choose to go it alone. Investing is not a part time endeavor, especially for a dedicated employer committed to growing their own business. Assuming responsibility for a complex set of decisions outside of one’s professional expertise is at best a risky endeavor. At worst it is a liability that lands them in court.

Here’s what the Supreme Courts said about a sponsor’s fiduciary responsibilities for the investments in their 401(k) plan:

“Expenses such as management or administrative fees, can sometimes significantly reduce the value of an account in a defined contribution plan.”

“(The District Court) wrote that respondents had ‘not offered any credible explanation’ for offering retail-class, i.e., higher priced mutual funds that ‘cost the Plan participants wholly unnecessary (administrative) fees,’ and it concluded that, with respect to those mutual funds, respondents had failed to exercise ‘the care, skill, prudence and diligence under the circumstances’ that ERISA demands of fiduciaries.”

“Under trust law, a trustee has a continuing duty to monitor trust investments and remove imprudent ones.”

“This continuing duty exists separate and apart from the trustee’s duty to exercise prudence in selecting investments at the outset.”

“Rather, the trustee must ‘systematically consider all the investments of the trust at regular intervals’ to ensure they are appropriate.”

“Managing embraces monitoring…”

“A trustee’s duties apply not only in making investments but also in monitoring and reviewing investments, which is to be done in a manner that is reasonable and appropriate to the particular investments, courses of action, and strategies involved.”

Hiring a ERISA § 3(38) investment manager to assume the fiduciary responsibility related to your plan’s investments nothing less than smart risk management by the plan sponsor. It is as essential to a well-run business as their accident liability insurance, nothing more and nothing less.