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ERISA COMPLIANCE FOR YOUR 401k PLAN...

401(k) Investing Help

education and investment advice for plan participants

 

 
1)

Providing 401k plan participants with information about retirement investing guidance services helps your company meet its ERISA 404c compliance responsibilities

2)

Investing guidance services can help boost your 401k plan's participation and allocation rates

3)

Investing guidance services can be paid for by the individual 401k participants using them or by your company

4)

Listing of personalized retirement planning, 401k investing advice services available online for 401k participants

5)

Professional help in educating plan participants

6)

401(k) Easy helps you meet your 401k plan's 404c requirements on several fronts

7)

404c protection for 401k plans that use self-directed brokerage accounts

8)

About the required fidelity bond ("ERISA bond" or "fiduciary bond")

8)

The 3 Principles of Successful Investing

[topic 1]

ERISA 404c compliance is easy with 401(k) Easy.Providing 401k Plan Participants With Information About Retirement Investing Guidance Services Helps Your Company Meet Its ERISA 404c Compliance Responsibilities

ERISA Section 404c says 401k-sponsoring companies need to, among other things, provide their employees with adequate information about their plans' investments, 401k investing and related matters.

401(k) Easy includes general and plan-specific disclosure and investment education materials for your employees. In addition, your company receives informative materials for your employees about personal investment advice services available online and/or available from SEC-registered Investment Advisors. Plan participants can choose to utilize investment advice services to help them make educated 401k investment decisions.

-- There are many credible sources that deliver fast, timely, professional 401k investment advice to individual 401k participants.

-- Personalized investment advice is available online and from SEC-registered Investment Advisors.

-- The services are generally for people a few years or more away from retirement, not the ready-to-retire or already retired.

-- Plan participants generally pay for the services themselves (those who use the services pay, those who don't, don't), although most services allow employers to choose to pick up the tab.

-- Having participants pay for 401k investment guidance services themselves, gives your 401k participants the freedom to choose the service that best suits their needs. Not all your 401k plan participants who choose to use a private retirement investment consulting service need choose to use the same service.

-- Informing plan participants about such 401k investment guidance services, coupled with providing the basic investing information included in your 401(k) Easy package and provided by the investment companies, helps employers fulfill their ERISA 404c responsibility to provide adequate investment information and guidance to 401k participants.


[topic 2]

Investing Guidance Services Can Help Boost Your 401k Plan's Participation and Allocation Rates

Individual retirement investment guidance services help your plan participants decide how much to defer into the 401k and how to invest those deferrals. Their advice often boosts participation in 401k plans:

-- Statistically speaking, 401k participants left on their own rarely defer as much as experts would recommend, especially down the road, years after initially joining the plan, when income has generally increased (often substantially) yet participants have not adjusted their contribution rates have not been accordingly.

-- Most non-salaried employees generally do not join 401ks, even though they, too, could benefit greatly from the tax-deferred savings potential the plans offer. Having them consult with an independent professional retirement planner can motivate them to join their company 401k.

-- Because uncounselled 401k participants often don't invest their deferrals optimally nor adjust their investment allocations as they move through their employment years, most 401k participants don't maximize their account growth potential.

-- Helping your employees find professional, unbiased retirement planning advice that they can afford can help boost your plan's participation and deferral rates.

The information and services help individuals answer three important questions:

-- Will I have enough to retire?

-- How should I invest for retirement?

-- What do I do when markets change?

 


[topic 3]

Investing Guidance Services Can Be Paid For By the Individual 401k Participants Using Them or By Your Company

Most personal retirement investing services allow for either the employer to pay for the service or for the individual employees using the service to pay.

-- All of the online 401k investment guidance services described in this website permit individual employees using the services to pay for the advice. None obligate the employer to pay any fees for employees' use of the 401k investment guidance services.


[topic 4]

Listing of Personalized Retirement Planning, 401k Investing Advice Services Available Online to 401k Participants

Below are the industry leaders in online retirement advice (listed in alphabetical order). Informing 401k participants and prospective participants about more than one service gives the participants the freedom to choose the service best-suited to individual needs.

-- All of the below are INDEPENDENT investment advisors. None sell mutual funds, stocks, insurance products or any other investments nor receive commissions of any kind on investments they recommend. In addition, none have paid any fee for their listing or otherwise compensated 401(k) Easy for inclusion in this website.

-- All of the below offer personalized, specific information about how much to invest in which plan investments.

-- The below are listed in alphabetical order.

Services Notes
ClearFuture
morningstar.com/

-- Bases recommendations on retirement income goals, not risk toleration

-- Derives several potential investment strategies based on investments available and retirement income goals

-- Ongoing projections include showing potential effects of holding or selling during turbulent market times

-- Integrated with Morningstar reports and information (quick access to "view Morningstar report" on investments being considered)

-- by Morningstar, the industry leader in providing mutual fund, stock and variable-annuity investment information

FinancialEngines
financialengines.com

-- FOR FREE: Extensive "Monte Carlo" style of modeling that, rather than assuming static investment returns and inflation rates over time, takes into account numerous possible economic cycle scenarios based on varying combinations of future investment returns and inflation rates in determining the probability that the client will reach his/her retirement goals

-- FOR PAYING CLIENTS: Advice on exactly how much to invest in which of your plan's specific 401k investments to improve your chances of reaching your retirement goals; daily tracking of the clients 401k investments' performances and their effect on his/her account; ongoing advice about needed changes in the account due to current and projected investment performance and economic cycles

-- Do not counsel on investments outside the 401k but do take client's outside holdings into account in making 401k recommendations

-- Computerized modeling system by Nobel Prize-winning economist Bill Sharpe and others

-- Highly touted by the Los Angeles Times (8/5/99), San Francisco Chronicle (11/23/99), and The Wall Street Journal (8/12/99), among others

-- $28.95 per 3 months (April, 2000)

-- Accepts fiduciary responsibility for advice it gives, relieving employers from such responsibility

The Motley Fool
motleyfool.com

-- The Motley Fool (TMF), founded in 1993 by brothers David and Tom Gardner, is a multi-media financial advice and information service distributed by website, syndicated radio programs, publications and seminars.

-- All TMF programs are geared to the non-professional novice investor. One of the key benefits of TMF educational materials and services is that complex investments and financial strategies are described in simple layman's terms suitable for mass market appeal.

-- The Motley Fool website ( www.motleyfool.com) contains interactive financial planning tools, unbiased monetary advice, and educational services to help investors manage their retirement savings.

-- TMF also maintains a financial help line and a number of other fee-based services, and provides advice about taxes, employee benefits, budgeting, retirement, college funds, insurance, estate issues, investments, etc.

mPower
(formerly Emergent Advisors)

mpower.com

-- Investment guidance for either only 401k assets or all retirement assets

-- Customized risk profiling

-- Portfolio tracking and analysis, including a comparison between current and recommended allocation levels

-- Advice on employee stock plans

-- One-year, five-year, at-retirement portfolio simulation

-- Parent company of 401k Forum (www.401kforum.com), a registered investment advisor

-- Parent company to 401 Kafe (www.401kafe.com), an online community and content site dedicated exclusively to 401k participants nationwide

Other services include Directadvice.com. The Wall Street Journal favors FinancialEngines services to Directadvice's for being simpler and easier to understand, and for more useful projections about investments actually meeting your retirement goals (Thursday, August 12, 1999) -- but your 401k plan participants find it valuable to know Directadvice.com is out there, too.

GuidedChoice (www.guidedchoice.com) offers Internet-based financial analysis of 401(k) participant accounts in a format that is easy to use for even the most novice investor. GuidedChoice solutions offer participants unbiased, personalized, expert investment advice based upon mathematical formulas and algorithms.


[topic 5]

Professional Help in Educating Plan Participants

Beyond the enrollment materials, video, and online resources included with 401(k) Easy, additional professional help in educating plan participants is available from various consultancies. 

Education Consultants render unbiased, factual information and guidance in all aspects of 401(k) participation. Plan participants appreciate the "self-serve" functions of 401(k) Easy, and will also benefit from a customized enrollment meeting conducted on-site by a knowledgeable 401(k) Education Specialist. The Education Specialist explains the mechanics of 401(k) participation and the advantages of enrolling. 
Key components include: 

-- how plans work, 
-- their inherent tax advantages, 
-- proven, time-tested unbiased information
 -- and techniques for participants to use in selecting 401(k) investments that fit their needs and objectives.

Group presentations usually run about one hour and include time for questions and answers. These presentations are performed throughout the day to accommodate varying employee schedules. 401(k) Education Specialists are retained by the plan sponsor on a per diem basis, and fees are negotiated directly between the two parties. One such 401(k) Education Specialist that offers expert education and unbiased guidance through on-site enrollments is www.presentmy401k.com.

Is investment education required under the law? There is a common misperception that investment education is required under Section 404(c) to transfer investment responsibility and liability to the employees. There is no such requirement. In fact, footnote 1 to the Department of Labor Interpretive Bulletin states: 

The section 404(c) regulation conditions relief from fiduciary liability on, among other things, the participant or beneficiary being provided or having the opportunity to obtain sufficient investment information regarding the investment alternatives available under the plan [such as prospectuses] in order to make informed investment decisions. Compliance with this condition, however, does not require that participants and beneficiaries be offered or provided either investment advice or investment education, e.g., regarding general investment principles and strategies to assist them in making investment decisions. 29 CFR Sec 2550.404c-1(c)(4).


[topic 6]

401(k) Easy Helps You Meet Your 401k Plan's 404c Requirements on Several Fronts

With 401(k) Easy, meeting ERISA 404c requirements regarding investment diversity and availability of pertinent information is easy:

-- The 401(k) Easy software permanently logs all employees' requests for information regarding 401k enrollment, investing, loans, hardship withdrawals and more.

-- Your plan has an extensive array of 401k investment opportunities, from no-load mutual funds to self-directed brokerage accounts.

-- Your 401k plan participants' can change their investment choices and/or contribution levels as often as you choose to allow.

-- Participants' accounts receive daily asset valuation.

-- Participants receive MONTHLY statements regarding their 401k accounts.

-- Participants have 24-hour-a-day, seven-day-a-week access to their personal account information and easy access to prospectuses for all 401k investments offered within your plan.

-- 401(k) Easy comes with written materials to be passed out at your enrollment meetings that introduce your employees to the online retirement guidance and education services described above. Participants can individually choose to sign up for services from such industry leaders as FinancialEngines. Individuals pay for the services themselves, yet your company benefits in meeting its 404c compliance by providing the introduction.

-- 401(k) Easy comes with plan-specific disclosure materials for your employees.

-- 401(k) Easy comes with general 401k and investment education materials in both printed and video format for your employees.

-- 401(k) Easy prepares and updates account statements for each participant every month (even prepares mailing labels to make distributing statements quick and simple).

-- The 401(k) Easy User's Guide tells you what information to distribute when and to whom.


[topic 7]

404c Protection for 401k Plans That Use Self-Directed Brokerage Accounts

Because self-directed brokerage accounts do not fall under the definition of "designated investments" for 401k plans, companies have no specific sets of information, such as investment prospectuses and performance information, that they must provide to plan participants regarding self-directed brokerage account investments. What does need to be provided is:

-- A statement that the plan intends to be a 404c plan and that the fiduciaries will be relieved of liability.

-- The identity of a 404c fiduciary.

-- A description of available investment alternatives, with specific information about designated alternatives (i.e., specific mutual funds being offered within the plan in addition to the self-directed brokerage accounts).

-- General disclosure regarding investment through a self-directed brokerage account.

With the exception of disclosure regarding investment through self-directed brokerage accounts, the above must also be supplied for plans using "designated" investments, such as mutual funds.

-- With 401(k) Easy, you're covered — your plan's customized Summary Plan Description, Plan Enrollment Form and related documents provide the above 404c-related information to your employees, and all 401(k) Easy documents are easy for lay people to read and understand. 

For more information about designated and nondesignated investments and their 404c compliance ramifications, please read Panel Publishers 401(k) Advisor article, "Personal Brokerage Accounts: Is 404c Protection Available?" September, 1999.


[topic 8]

About the Required Fidelity Bond ("ERISA Bond" or "Fiduciary Bond")

ERISA regulations require that all pension plans, including 401k plans, be insured by an ERISA bond that has a payout equal to 10% of plan assets or $500,000, whichever is less. The annual premiums for these special ERISA bonds (also called "fiduciary bonds") are very low, averaging approximately $200 per year or less.

-- An ERISA bond that covers a 401k plan with $100,000 in assets can cost as little as $100 per year; an ERISA bond covering plan assets of $1 million costs approximately $275 per year.

ERISA bonds are not only inexpensive, but they are readily available and easy to purchase. Your business insurance agent is the best person to contact for ERISA bond coverage. Colonial Surety (not affiliated with Pension Systems Corporation) offers online price quotes and order forms for reasonably priced ERISA fidelity bonds for 401(k) plans. Colonial's fidelity bonds comply with US Department of Labor guidelines and requirements, and can be delivered to the purchaser the next business day. Please go to www.colonialsurety.com for more information. Other companies that provide inexpensive ERISA fidelity bond coverage include:

-- CHUBB Insurance (contact local agent)

-- Hartford Insurance, call (888) 656-0817

-- Travelers Insurance, go to (www.travelers.com)

-- Maloney & Associates, call (760) 738-2610

Here are answers to a few frequently asked questions about ERISA bonds…

What's the difference between an ERISA bond, a fidelity bond, and a fiduciary bond?

-- There's no difference. ERISA bonds and fiduciary bonds are essentially amended fidelity bonds. All three respond to claims involving dishonest acts on the part of asset investment advisors or the employer. The ERISA bond, sometimes referred to as a fiduciary bond, pays claims directly to the plan participants. The fidelity bond pays the claims of the investment advisor that resulted from the dishonest acts of the investment advisor's employees.

How do fidelity bonds and ERISA or fiduciary bonds differ from errors & omissions insurance?

The fidelity, ERISA and fiduciary bonds cover against losses due to a criminal act. Errors & omissions insurance provides employers and advisors with coverage against losses due to any actual or alleged negligent act or error committed while engaged in performing professional services.

What's the difference between errors & omissions insurance and fiduciary liability insurance? 

Errors & omissions policies protect the investment advisor and employer from losses due to an actual or alleged negligent act. In comparison, fiduciary liability insurance is a sub-category of errors & omission insurance, and provides additional coverage against a breach by any plan fiduciary. This coverage is not the same as provided by an ERISA bond because it does not insure against criminal acts on the part of a plan fiduciary.

 

[topic 9]

 

Intro...
Ensure Your Plan's Appeal With Great Investments

One reason to strongly consider 401k Easy Online for your company 401k plan is the tremendous array of investments your plan will be privy to. It's no secret that appealing investments inspire initial as well as ongoing 401k participation. They're arguably THE most important determinant to your 401k plan's health and success. (You'll already have nailed down convenience, accessibility, etc., with 401k Easy Online's user-friendly, 24-hour-a-day-accessible architecture.)

Of course, investments one employee finds appealing may not interest another; they may not even interest the first employee five, ten years from now.

So how do you select investments for your company 401k plan? 401k Easy Online gives you access to more than 600 mutual fund families representing more than 10,000 different mutual fund portfolios, plus access to self-directed brokerage accounts. Do you offer all the options? Not likely, unless your employees have a tremendous amount of time on their hands to read through 10,000-plus investment prospectuses. So how then do you sufficiently narrow the field without over-restricting it?

This page explains three fundamental principles to effectively choosing 401k plan investments -- not only in terms of the investments' appeal to your employees, but also in helping you meet relevant government regulations regarding diversity, etc., in the investments chosen for each 401k plan. The content has been written in terms of mutual funds but can easily be extrapolated to choosing self-directed brokerage accounts. And remember…

-- Your goal is to derive an investment lineup that will fit the needs and financial objectives of your company's potential 401k plan participants.

-- There is no single "best" lineup of investments.

-- Your choices are not set in concrete. 401k Easy Online lets you add and/or remove investments from your plan if and when the need arises.

-- We derive no financial benefit or incentive from recommending any mutual fund or brokerage company. If you contact us for help with choosing your plan's investments, you can be assured that our input has only your plan's health and appeal in mind.

-- We follow our own advice. Our investment recommendations will always focus on quality fund providers offering a wide spectrum of suitable investments, ones that span the range from the ultra-safe, low-risk, conservative investments to the highly volatile, high-risk, high-potential-return investments; such can satisfy a wide range of investors, ones with varying personal needs, investment objectives and investing experience.

-- 401k Easy Online contains an extensive catalogue of easy to understand literature to help your employees make educated investment decisions. We recommend that you, as an employer, refrain from dispensing investment advice. Instead, simply direct your employees to the quality materials contained within 401k Easy Online.

Principle 1: Diversification

The most common -- and detrimental -- mistake made in choosing plan (and personal) investments is to base a decision on an investment's performance history, particularly its recent performance history. Investment performance is cyclical: a mutual fund that's blazing hot today may be as cold as ice tomorrow, and vice versa. Past performance is no guarantee of future results. It should be considered as only one indicator of an investment's suitability.

A better approach is to let your objective be your primary guiding light. For choosing your company's 401k plan investments, your objective is to select a spectrum of investments that will prove appealing and satisfying to your employees' diverse investment needs. The spectrum, not fund-by-fund performance, is your quarry.

To achieve a suitable spectrum of investment options, select one, two or three mutual fund families, then choose a cross-section of funds from within each family. Mutual fund companies compete for investment dollars by trying to out-perform each other. Your employees can benefit from this competition with access to even a single reputable fund family; access to a second or third family grants added choice and flexibility. By listing a cross-section of investments within each family group, your employees will be able to find investments that suit their investing temperaments and needs, now and down the road.

At minimum, your plan needs to offer investments geared toward the following:

-- Preservation of Principal
Money market funds are the default choice for "safe" investments. Remember, though, that they are not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency.

-- Income
For a steady stream of income, your plan will need funds that invest in bonds. Like stocks, bonds experience fluctuating share prices, though generally to a lesser degree.

-- Income and Growth
Balanced funds, also known as "lifestyle funds," invest in combinations of stocks and bonds. Balanced funds that hold a greater percentage of stocks over bonds are more volatile and potentially more profitable. Those that hold a greater percentage of bonds over stocks, on the other hand, are more stable but less likely to return big investment gains.

-- Growth
Stock funds (domestic or foreign) offer the greatest potential for long-term gain, but they also come with the highest risk: they're more volatile and have the greatest potential for posting investment losses.

Principle 2: Choose Investments That Fit Your Goals and Temperament -- and Those of Your Plan's Potential Participants

Stock and bond net asset values (share prices) fluctuate. Some fluctuate more frequently and more diversely than others. While this doesn't bother certain investors -- ones, perhaps, with plenty of time before retirement, ones used to the ups and downs of investing, ones with other sources of emergency money -- many investors prefer to avoid extreme volatility. As mentioned above, "growth" funds tend to be more volatile than "income and growth" funds, which tend to be more volatile than "income" funds, which tend to be more volatile than money market funds.

Investment returns should also factor into your decision. Compare investment returns to those of direct competitors' -- not to those from a different class of funds. You can compare returns of competing investments using any of several online services, including Standard & Poor (www.ratings.standardpoor.com), Morningstar (www.morningstar.com), Personal Fund's Online Fee Calculator (www.personalfund.com ), Mutual Fund Investor's Center (www.mfea.com ), SmartMoney Mutual Funds Research (www.smartmoney.com).

Don't be fooled by "cumulative total returns" showing how much an investment has grown or shrunk over several years. A large cumulative return when translated into average annual returns may not be large at all. For instance, a stock fund with a cumulative return of 101% over 12 years equates to an average annual return of only 6% compounded; such may or may not be competitive with competitors' funds or with the benchmark index.

Mutual funds, even no-load funds, are not free, nor, in general, are fees they charge closely regulated. The fees can vary widely from fund to fund (though competition, of course, does keep things in check to a degree). Each fund family sets its fees. The fees are spelled out within the investment prospectuses.

Mutual fund fees to look for include…

-- Expense Ratio
This is money deducted from a fund's earnings and assets to pay for annual operating expenses, including investment advisory fees, legal and accounting services, postage, printing, etc.

-- 12b-1 Fees and Sales Charges
These pay the fund's marketing and distribution expenses and are incorporated into the expense ratio. Some include a sales charge to compensate sales personnel.

-- Trading Costs
The cost of trading securities, including charges such as brokerage commissions, are not included in the fund's expense ratio but do reduce the returns investors receive.

Most entities that provide and support 401k plan investments -- mutual fund managers, fund distributors, asset custodians, asset trustees, investment brokers and advisors, plan administrators and record-keepers -- earn at least a portion of their compensation from asset-based fees deducted from plan assets.

We at Pension Systems Corporation, however, are the exception to the norm: We do not earn any compensation -- directly or indirectly -- from our clients' 401k plan assets. In cases where rebates are offered on investments, we have the rebates returned to our clients or directly applied to reducing our clients' costs. Our published prices, available online for all to see, are the only net compensation we collect.

We do not accept any rebates or revenue sharing of fees deducted from our clients' plan assets unless those fees can be returned to the clients' plans or used by Pension Systems Corporation to offset plan expenses.

Asset-based fees are an unavoidable fact of life if your company uses mutual funds or self-directed brokerage accounts for its 401k. The cost of these asset-based fees should be factored in when determining the true, overall cost of your 401k -- and the cost savings of 401k Easy Online returning such fees to clients when possible should be factored into our products' affordability.

For more information on asset-based fees we recommend reading "Revenue Sharing in the 401(k) Marketplace--Whose Money Is It?" by The McHenry Consulting Group and Study of 401(k) Plan Fees and Expenses by the US Department of Pension Welfare and Benefits.

Principle 3: Use a Long-Term Horizon When Selecting Your Investments Provider

401k investments are long-term investment vehicles. They're not designed (nor intended) for short-term results. Look towards fund companies that will stand up to the test of time.

The public image of the fund families you select for your company 401k plan will affect its popularity among your employees. As with other consumer products, mutual funds (and the companies that produce them) come in various shapes and sizes, with reputations and brand-name recognition to match.

Remember to consider…

-- Is the mutual fund company forthright?
If the company doesn't frankly discuss the potential drawbacks of an investment along with its attributes, go elsewhere.

-- Does the company follow a disciplined approach to investing?
Some companies do not ensure that their fund managers stick to the investment strategy described in the prospectus. Even the fund's portfolio name may be misleading; it may not reasonably represent the interlaying of stocks and bonds in the portfolio.

-- Does the company promote the recent fund performances?
You need to know how a fund has performed over the past three, five, ten years. Its performance during the last 24 months is inconsequential.

-- Does the company put experienced managers in charge?
How many years of experience does the manager have? What's his/her track record? Some companies allow relatively new managers to gain experience with their smaller funds.

We're Here To Help

The above are guidelines to help you select investments for your 401k plan that will encourage participation and effective retirement saving while ensuring that your company meets the federal mandates regarding 401k plan investment diversity.

We're here to help if you're still unsure of how to proceed with choosing investments for your 401k plan. Send an e-mail to info@401k-easy.com, or call (800) 595-4015.

 

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