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401k Investments

for 401(k) Easy run-it-yourself 401k plans

 

 
1)

With 401(k) Easy, you select your 401k plan investments

2)

Select a no load mutual fund family and/or self-directed brokerage accounts

3)

Things to consider in selecting your 401k plan investments

4)

Select the approach(es) best suited to your 401k needs

5)

Mutual funds are popular with 401k investors

6)

Special "401k Census" Website for Statistics-Based Insights into 401k Participation

7)

It's easy to get investment performance information

8)

Risk, Return, and Investing

9)

Important Information…

10)

Watch for hidden fees

11)

Common Investment Types

12)

Common Investment Terms

13)

Common Investment Objectives

14)

The 3 Principles of Successful Investing

15)

RIA Unitized Managed Accounts

401k Investing Success

[topic 1]

With 401(k) Easy You Select Your 401k Plan Investments

With 401(k) Easy, you get to choose your 401k plan investments — and you have a bounty of qualified investments to choose from:

-- Select self-directed brokerage accounts from trusted names like Charles Schwab, Cigna Financial Services or Fidelity Investments to give your employees the widest array of potential 401k investments. (See our Self-Directed Brokerage Accounts page for more information.)

-- Select from more than 200 SEC regulated no load mutual fund families from trusted providers like Fidelity Funds, Vanguard Funds and Dreyfus Funds to give your employees a more concise yet amply diverse 401k investment selection. (See our No Load Mutual Funds page for more information and specific no load mutual fund investment family listings.)

-- Select BOTH a no-load mutual fund family and self-directed brokerage accounts, if you like. It's all your choice with 401(k) Easy!

 

[topic 2]

Select a No Load Mutual Fund Family and/or Self-Directed Brokerage Accounts

As mentioned above, with 401(k) Easy you can choose from more than 200 no load mutual fund families for your 401k plan, or you can choose to give each 401k plan participant his or her own self-directed brokerage account — or you can choose to offer your plan participants BOTH a family of no-load mutual funds as well as the option of opening a self-directed brokerage account — and there's no extra charge by 401(k) Easy no matter which 401k investment approach you choose.

-- Visit our Self-Directed Brokerage Accounts page for more information on choosing self-directed brokerage accounts for your 401k plan, including a listing of accounts currently available for use with 401(k) Easy and contact information for each provider.

-- Visit our No Load Mutual Funds page for more information on choosing no-load mutual funds for your 401k plan, including specific listing of fund families currently available for use with 401(k) Easy and contact information for each provider.


Note: If you're unfamiliar with 401k investing and/or 401k investment terminology, click here to open our 401k Glossary in a secondary window for reference to while reading this page.

[topic 3]

Things to Consider in Selecting Your 401k Plan Investments

Here are just a few things to consider in selecting your 401k plan investments:

-- Your employees' current and projected investment goals.

-- Your employees' familiarity and comfort with investing.

-- Your employees' access to and comfort with the Internet (you wouldn't, for instance, want to select only self-directed brokerage accounts for your 401k plan if some of your employees are unfamiliar with or uncomfortable with using the Internet, since such is an integral part of self-directed brokerage account investment trading)

-- The types of investments you choose affects the fees your plan participants will be assessed, if any (by the mutual fund company and/or brokerage account company).

-- Self-directed brokerage accounts will give your employees access to most of the no-load mutual fund families available for use with 401(k) Easy, but there may be additional fees (a fee by the brokerage company in addition to any fee by the mutual fund company).

-- Investments with higher fees will need to perform better for your employees to yield the same return as they would with lower-cost investments. All sales loads and transaction fees as well as ongoing expenses (management fees, etc.) are listed near the front of each investment's prospectus. It is very important that you read the prospectus for any investment you are considering for your 401k plan (unless you're considering self-directed brokerage accounts, of course, in which case it would be impractical to read every potential prospectus).

-- There are pros and cons to both self-directed brokerage accounts and no-load mutual funds. The table below highlights some of the most pressing concerns.

-- Due to the administrative complexity of running a 401k plan with multiple no load mutual fund investment providers, we recommend that if you want to offer more than one family of no load mutual funds that you either offer just one family of no load mutual funds and also offer self-directed brokerage accounts or that you only offer self-directed brokerage accounts.

In selecting a mutual fund group for your 401k plan, it's important to include a spectrum of investments:

-- Include a money market fund for conservative investors seeking capital preservation.

-- Include some lower-risk equity and bond portfolios.

-- Include some medium-risk equity and bond portfolios.

-- Include some high-risk/potentially-higher-return equity and bond portfolios.

In this way your 401k plan will appeal to employees interested in amassing any of a variety of portfolio mixes. Employees can select portfolios that match their investment experience, temperament and objectives.

-- The above is not meant as a cookie-cutter formula for arriving at your 401k investment mix. It is a good idea to consult a professional tax and/or investment advisor in making your final decisions. We can help, too.

Free help is available through 401(k) Easy with choosing the investments for your 401k plan; contact us. You can also hire the services of independent investment consulting professionals such as FinancialEngines, ClearFuture or mPower, all of which specialize in personal financial advice but are also qualified to offer advice on choosing investments for your 401k plan. If you would like more information on these independent retirement planning services, please go to the following topic within our ERISA 404c page: Personalized Retirement Planning, 401k Investing Advice Services Available Online for 401k Participants.


[topic 4]

Select the Approach(es) Best Suited to Your 401k Needs

The following offers a brief comparison of self-directed brokerage accounts versus no-load mutual fund families:

Using Self-Directed Brokerage Accounts

Using No-Load Mutual Funds

Extensive selection of potential investments, including hundreds of no-load mutual fund families

Ample risk-return variety is available within each family of no-load mutual funds to meet most investors' current and future needs

Extensive selection of potential investments includes publicly traded stocks and bonds; transaction costs, if any, are deducted from the investor's account balance

No access to stocks and bonds

Burden of investment choice is on the employee

Some employees prefer their employer having narrowed the potential investment field down to a single quality family of no load mutual funds

Modest account fee — generally $20 to $30 — per year, charged to the employee's account

No such fees

Mutual fund management fees assessed, as described in each fund's prospectus

Mutual fund management fees assessed, as described in each fund's prospectus

Potential for less sophisticated investors to diminish overall returns by moving money around too frequently (see below)

Moving money around too frequently is less of an issue because a revised 401(k) Easy 401k Enrollment Form must be filed to change investment allocations (see below)

Go to more information on self-directed brokerage accounts and their use with 401(k) Easy

Go to more information on no-load mutual funds and their use with 401(k) Easy

With 401(k) Easy you can select a family of no-load mutual funds and/or self-directed brokerage accounts for your 401k plan.

-- As mentioned above, due to the administrative complexity of running a 401k plan with multiple no load mutual fund investment providers, we recommend that if you want to offer more than one family of no load mutual funds that you either offer just one family of no load mutual funds and also offer self-directed brokerage accounts or that you only offer self-directed brokerage accounts.


[topic 5]

Mutual Funds Are Popular With 401k Investors

Mutual funds are available both via self-directed brokerage accounts and, obviously, as no load mutual fund families. The funds are popular with 401k investors for several reasons:

-- Most mutual fund investments convert quickly and easily to IRA rollover accounts held at the fund company. The investor can keep the same investments and pursue the same investment strategy as with the 401k even after terminating employment.

-- Mutual funds have exchange privileges that allow investors to transfer money between portfolios within a fund family at no charge or for only a nominal bookkeeping charge.

-- Mutual funds are priced on a daily basis, and it's easy to order printed statements.

-- Mutual funds are usually offered in more than one class of shares. Investors can weigh investment amount, anticipated holding period and other relevant factors in deciding which class of shares to purchase.

-- It's easy for investors to access historical and current investment performance and portfolio details by calling the mutual fund companies directly and speaking with an account service representative or requesting prospectuses on the investments.

-- There are more than 6,500 different mutual fund portfolios available today — that's double the number available just 10 years ago.

-- An estimated 67 million U.S. households — nearly 25% — invest in mutual funds, either directly or through a company-sponsored 401k plan.

-- "Generation X" (ages 18 to 30) has the lowest level of household assets yet the second highest proportion of financial assets in mutual funds.

The flexibility afforded by mutual fund investments is very important to 401k investors, whose goals and retirement savings strategies can change dramatically during the often decades they participate in various 401k plans.

Important Information...

-- All mutual fund purchases are subject to a three (3) business day holding period; no exchange or liquidation is allowed within this three-day period. No-load, no transaction fee funds redeemed within 30 days of the purchase date may incur certain transaction fees. For regulatory reasons, investing in mutual funds is available only to U.S. citizens and permanent residents of the United States.


[topic 6]

Special "401k Census" Website for Statistics-Based Insights into 401k Participation

On an ongoing basis we "blind sample" live investment and contribution data generated from many thousands of 401k investor accounts. This raw data is analyzed and quantified, and the results posted in this special website (www.401kcensus.com) in real time. Only blind sampling of data is performed; no personal identities or personal investment selections are accessed or included in the analysis and postings. 401k Census allows easy comparison of 401k investing profiles for various demographic groups, and visitors learn which classes of investments are the most popular with 401k participants.


[topic 7]

It's Easy to Get Investment Performance Information

Performance information adds to your knowledge about an investment gained from reading the investment's prospectus. The most common ways to get specific investment performance information are:

-- Contact the investment company directly.

-- Utilize free online mutual fund rating services. A web search for "investment ratings" will bring up dozens of independent, consumer-oriented mutual fund rating services. Morningstar (www.morningstar.com), Standard & Poor (www.ratings.standardpoor.com), Value Line (www.valueline.com), Mutual Fund Investor's Center (www.mfea.com), and Smart Money (www.smartmoney.com) are some of the most popular sources for independent, unbiased ratings and comparisons; they have solid reputations, but they're by no means the only reliable services.

-- Utilize your favorite web browser or search engine. All have quick access to mutual fund information. Please refer to your particular browser/search engine for details.

Keep in mind...

-- Most rating services charge for certain types of performance information.

-- Performance information received from mutual fund companies is generally free.


[topic 8]

Risk, Return, and Investing

Investing is a risk-return dichotomy. Mutual fund money market investments are considered very safe, and offer a relatively low, predictable rate of return, although that return, like any, cannot be guaranteed. At the other end of the risk-return dichotomy are mutual funds that can be extremely violate, offering investors the possibility of dramatic gains (and losses).  Mutual fund investments can lose value in a volatile market -- just as they can gain value.

Shares of mutual funds are not deposits of or guaranteed or endorsed by, any financial institution; they are not insured by the Federal Deposit Insurance Corporation (FDIC), Federal Reserve Board, or any other agency, and they involve risk, including the possible loss of the principal amount invested.

In general, the more volatile a mutual fund investment (i.e., the less predictable its rate of return), the more POTENTIALLY lucrative its earnings. More volatile investments are considered to be more risky investments.

The investment return and principal value of an investment will fluctuate. An investor's shares, when redeemed, may be worth more or less than when purchased.

According to the Investment Company Institute, the mutual fund industry's trade association, for the twelve months from July 30, 1999 to July 30, 2000, approximately 42% of assets in the average stock mutual fund were bought or sold, meaning only a bit more than half the money in the fund actually stayed put for that period. That is up from approximately 40% turnover for the 12 months prior. Some retirement plan experts believe some of this fast trading is occurring in 401k plans.

According to most academic studies, frequent trading of mutual funds to squeeze out a few percentage points of gain is a bad idea. Studies confirm what has been suspected by professional money managers for years — namely, that frequent mutual fund trading usually hurts long-term returns.

As reported in The Wall Street Journal, one recent study* by University of California, Davis assistant professor Terrance Odean and professor Brad Barber found that investors who traded mutual funds most frequently had the worst returns for a five-and-a-half year period ending December 1996. During that period the average household earned an annualized return of approximately 15.3% from their mutual fund investments. Frequent mutual fund traders earned an average annualized return of only 10% for the same period.

*Source: The Wall Street Journal, September 22, 2000, Lucchetti, Aaron, "Frequent Trading Worries Fund Firms"


[topic 9]

Important Information...

Nothing herein is an offer or solicitation to sell securities, products or services in any jurisdiction wherein their offer or sale is not qualified or exempt from regulation.

-- For mutual fund information, including investment policies, charges and expenses pertaining to the fund group, contact the mutual fund companies directly or contact us for the name of a qualified NASD-registered Broker/Dealer to assist you.

-- Many mutual fund companies offer online viewing of prospectuses.

-- Fund prospectuses are detailed descriptive documents about investments. They are published by the mutual fund company housing the investment and list all fees involved as well as other important information. They must meet stringent disclosure rules.

-- Fund prospectuses are always FREE and should be read carefully before investing any funds.

-- A fund's past performance never guarantees its future results. Performance history should only be one of several determining factors in choosing your plan's investments.

-- In addition to reading fund prospectuses in choosing your 401k investments, you may also want to request from the mutual fund company and read the fund company's annual and semi-annual report to shareholders for a clearer picture of the fund's investment goals and policies.

-- Shares of mutual funds are not deposits of, or guaranteed or endorsed by, any financial institution; they are not insured by the Federal Deposit Insurance Corporation (FDIC), Federal Reserve Board, or any other agency, and they involve risk, including the possible loss of the principal amount invested.

-- The investment return and principal value of an investment will fluctuate. An investor's shares, when redeemed, may be worth more or less than original cost.

-- All mutual fund purchases are subject to a three (3) business day holding period; no exchange or liquidation is allowed within this three-day period. No-load, no transaction fee funds redeemed within 30 days of the purchase date may incur certain transaction fees. For regulatory reasons, investing in mutual funds is available only to U.S. citizens and permanent residents of the United States. 401k participants may be exempt; you should check with your tax advisor if any of your potential 401k plan participants are not official U.S. residents.

-- Many load mutual funds are offered in more than one of three classes of shares (A, B and C). Classes differ in their pricing conventions and/or annual fees. Because there is wide variation even within a single class of mutual funds, reading prospectuses is the only way to be certain of particular investment's pricing and fee structure, regardless of its class. In deciding whether to choose a particular class of shares for your 401k plan, it is important to consider the amounts your employees will likely be investing, the shares' anticipated holding period and other relevant factors explained in each investment's prospectus.


[topic 10]

Watch for Hidden Fees

The US Labor Department is currently auditing 401k plans of all sizes because of a trend that may violate current pension laws. Many companies, especially smaller businesses, are shifting plan administrative expenses to plan participants, knowingly or unknowingly. This shift of plan expenses come in the form of "hidden fees" that are routinely deducted from each participants' retirement savings by some plan providers and mutual funds. Because of lax reporting requirements, no one really knows how much money changes hands behind the scenes, but it is estimated that excessive fees may be as much as $1.5 billion per year, and growing.

In the 401k arena, expense fee disclosure, whether to plan participants or plan sponsors, has been notoriously confusing and unclear. The impact of these confusing hidden fees on plan participants' retirement accounts can be very significant over time. As example, consider a hypothetical 401k investment such as a mutual fund, with deducted expense fees of 1.3 percent versus one with fees of just .3 percent. Applied to an initial 401k investment of $5,000, with regular annual investments of $5,000 returning 10 percent, and compounded over 15 years, the difference between the "low-fee" investment and the "high-fee" investment adds up to $15,398. That's a significant sum deducted from a participant's retirement savings.

Policymakers and plan sponsors seeking to structure well-managed 401ks for their aging workforces are beginning to acknowledge the negative impact hidden fees has on eroding pension accumulations for retirement. What might appear to be a small difference in deducted investment fees can result in substantial differences in eventual retirement benefits.


[topic 11]

Common Investment Types

Money Market Fund:
A relatively low-risk mutual fund (when compared with others) managed to maintain a stable $1 share price/NAV. Investments in these funds are neither insured nor guaranteed by the U.S. government, and there can be no assurance that a fund will be able to maintain a stable net asset value of $1 per share.

Bond Funds (aka, Fixed Income Funds):
Mutual funds that have higher risks than money market funds but seek to pay higher yields. Not restricted to high-quality or short-term investments (as are Money Market Funds). Because there are many different types of bonds, bond funds can vary dramatically in their risks and rewards. Long-term bond funds invest in bonds with longer maturities (a longer length of time until final payout). The values of long-term bonds can go up and down more rapidly than those of shorter-term bond funds.

Stock Funds (aka, Equity Funds):
Mutual funds that generally involve more risk than Money Market or Bond funds -- but they also can offer the highest returns. A Stock Fund's value (NAV) can rise and fall quickly over the short term, but historically stocks have performed better over the long term than other types of investments. Not all stock funds are the same (e.g., Growth Funds focus on stocks that may not pay a regular dividend but have the potential for large capital gains; other specialize in a particular industry, such as technology).


[topic 12]

Common Investment Terms

Expense Ratio:
The annual fee charged to mutual fund shareholders (usually as a percentage of total investment) for the administration, operation and management expenses associated with a particular fund. May include management fees, 12b-1 fees and other fees, but does not include sales charges. Shows the actual amount that a fund takes out of its assets each year to cover its expenses.

Index:
Indicators of trends in markets, sections of the economy, or other economic indicators, such as precious metal or Treasuries. Some of the most common indices include the Dow Jones Industrial Average, the NASDAQ Composite and the S&P 500.

Investment Objective:
Indicates a particular fund's investment goals, based on the wording in the fund's prospectus.

Mutual Fund:
A collection of money invested in a group of assets (stocks, bonds and other securities) and managed by an investment company (a mutual fund company or other). The combined holdings of the stocks, bonds and other securities and assets the fund owns are known as its portfolio. Each investor owns shares of the portfolio; each shares represents a percentage ownership in the portfolio holdings.

Net Asset Value (NAV):
The per share market value (price) of a mutual fund; in general, the price offered to purchase one share of the mutual fund. The NAV in most cases is calculated by including the closing day's prices of all securities held in a particular fund, plus all other assets owned by the fund (including cash), subtracting all liabilities of the fund, and then dividing the sum by all the outstanding shares of the fund on that given day. If the fund is a no-load fund, then the offering per share price for the fund and the NAV per share will be the same.

Prospectus:
A fund's formal written statement, generally issued on an annual basis. In this statement the fund sets forth is proposed purposes and goals, and other facts (such as performance history and investment objective) that an investor should know in making an informed decision.

S&P 500:
The Standard & Poor's 500; a market value weighted index of 500 blue chip stocks. An index that's considered to be an overall benchmark of the market as a whole.

Ticker Symbol:
The letters assigned to a particular stock, option or mutual fund used to identify that particular security for trading or quoting purposes.


[topic 13]

Common Investment Objectives

Money Market:
Seeks stable income by investing in short-term IOU's. Yields reflect variations in prevailing short-term interest rates.

Government Bond--General:
Offerings that pursue income by investing in a combination of mortgage-backed securities, treasuries and agency securities.

Corporate Bond--General:
Seek income by investing in fixed-income securities, primarily investment-grade corporate bonds.

Corporate Bond--High Yield:
Seek income by generally investing 65% or more of assets in bonds rated below BBB. The price of these issues is generally affected more by the condition of the issuing company (similar to stock) than by the interest rate fluctuation that usually causes bond prices to move up and down.

World Bond:
Seek current income with capital appreciation as a secondary objectives by investing primarily in debt obligations issued throughout the world. These bonds are frequently foreign government issues.

Balanced:
Seek both income and capital appreciation by investing in a generally fixed combination of stocks and bonds. These funds generally hold a minimum of 25% of their assets in fixed-income securities at all times.

Asset Allocation:
Income and capital appreciation are dual goals for funds with this objective. Managers often use a flexible combination of stocks, bonds and cash; some, but not all, shift assets frequently based on analysis of business-cycle trends.

Equity-Income:
Funds expected to pursue current income by investing at least 65% of their assets in dividend-paying equity securities.

Growth and Income:
Growth of capital and current income are near-equal objectives for these funds. Investments are typically selected for both appreciation potential and dividend-paying ability.

Growth:
Funds that pursue appreciation by investing primarily in equity securities. Current income, if considered at all, is a secondary concern.

Emerging Growth:
Seek rapid growth of capital and that may invest in emerging market growth companies without specifying a market capitalization range. They often invest in small or emerging growth companies and are more likely than other funds to invest in IPS's or in companies with high price/earnings and price/book ratios. They may use such investment techniques as heavy sector concentrations, leveraging and short-selling.

Small Company:
Seek capital appreciation by investing primarily in stocks of companies with market capitalization of less than $1 billion. In this objective, income payments from dividends are unlikely.

World Stock:
Funds that invest primarily in equity securities of issuers located throughout the world, while maintaining a percentage of assets (normally 25% to 50%) in the United States.

Foreign Stock:
Funds that invest primarily in equity securities of issuers located outside of the United States.

Specialty:
Funds that invest primarily in equity securities of issuers within a narrow industrial category (automotive, travel, electronics, etc.).


[topic 14]

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.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.

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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.

 


[topic 15]

RIA Unitized Managed Accounts

Unitized Managed Accounts for RIA-Managed Pooled Investments-Now the RIA Can Offer Custom Portfolios to a 401k Plan.

Today many Registered Investment Advisors (RIA) want to use their investing knowledge and expertise to offer custom portfolios to their clients’ 401k plans. A Unitized Managed Account (UMA) is the way this gets accomplished efficiently and affordably. Essentially the RIA used a UMA to create a private ‘mutual fund’ for the client’s plan; shares of this private ‘mutual fund’ trade like any other mutual fund shares within the 401k plan.

Unitized Managed Accounts give Registered Investment Advisors a wider range of options for their 401k plan sponsor- clients, at a very competitive price, and with full fee disclosure. The UMA, managed online by the RIA, is a pooled account that may include publicly traded stocks, bonds and exchange traded funds, as well as mutual funds. The typical UMA portfolio accounting system calculates the account’s precise unit price each night based on the total market value of the underlying securities held in the pool. UMAs are then “unitized” on a daily basis, and settled in a T + O environment. This creates a true daily environment, so that 401k participants can self-direct their personal 401k investments. Historically this type of offering was only available to the mid-to-large 401k plan market. Now small plans can afford to take advantage of this service, at competitive prices. There at two basic UMA configurations available to 401k plans.

Configuration I: RIA Actively Managed Portfolio

A Registered Investment Advisor (RIA) works with the Employer-Plan Sponsor to determine the investment objective for each UMA portfolio. The RIA designs the UMA portfolios, which can range from asset allocations such as conservative to aggressive, or balanced to age-targeted. The RIA actively manages the underlying assets in the UMA, and places the mutual fund trades through a web-based trading platform. In addition to providing the platform for the RIA to manage the portfolio, the UMA provider settles the trades placed by the 401k plan participants to buy, sell or exchange the UMA assets for other investment options in the plan. Specifics:

• Accommodates mutual funds only

• UMA is actively managed by the RIA

• Average $1,000 annual fee paid to UMA provider for each portfolio

Configuration 2: Set Target Asset Allocation Portfolio

An RIA works with the Employer-Plan Sponsor to determine the investment objective for each portfolio, and sets a specific target asset allocation model for each portfolio. The portfolio can be comprised of a variety of assets: mutual funds, publicly-traded stocks and exchange traded funds. This configuration includes portfolios consisting of a cash component for liquidity, and employer stock (including privately held employer stock, under certain conditions) to provide plan participants with T+O trade settlement in an employer stock investment option. The UMA portfolio may be re-balanced back to the targeted asset allocation model each time there is participant activity, or on a schedule as determined by the RIA/Employer. Specifics:

• UMA can accommodate a variety of assets and asset types

• UMA is managed by an independent investment advisor

• UMA-provider executes underlying trades

• Average $1,500 annual fee paid to UMA provider for each 'mutual fund only' portfolio

• Average $2,500 annual fee paid to UMA provider for each 'multiple asset type' portfolio



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