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Using No-load Mutual Funds

in your 401(k) Easy run-it-yourself 401k plan

 

 
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View a listing of potential no-load mutual fund families for your 401(k) Easy 401k plan

1)

Mutual funds are the #1 choice of 401k investors

2)

No-load versus load mutual funds and their applicability to 401(k) Easy

3)

With 401(k) Easy you can select a family of no-load mutual funds OR offer the family of no-load mutual funds plus self-directed brokerage accounts

4)

Choosing a family of no-load mutual funds for your 401k plan

5)

Looking for a mutual fund group we don't have listed?

6)

It's easy to get mutual fund performance information

7)

A few comments about risk, return and investing

8)

A few comments about trading mutual funds frequently

9)

A word about mutual fund expense fees

10)

Watch for hidden fees

10)

Our Policy Regarding All Asset-Based fees

401k Mutual Fund Investing

[topic 1]

Mutual Funds Are the #1 Choice of 401k Investors

Mutual 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, and is free to later change the investments if he/she wishes.

-- They 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.

-- They are priced on a daily basis.

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

-- Most fund groups offer 24-hour-a-day telephone access to 401k account information.

-- 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; much of the information is also available online.

-- Investors have 24 hour a day phone and/or Internet access to their 401k accounts.

-- Investors receive account statements every month at their home addresses and can order supplemental statements at any time.

-- 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.


[topic 2]

No-Load Versus Load Mutual Funds (and their applicability to 401(k) Easy)

Mutual funds come in two types: load funds and no-load funds. Load mutual funds charge either a front-end (purchase) or back-end (liquidation) fee on shares. No-load funds do not. Both work equally well with 401(k) Easy 401k plans.

Because most no-load mutual funds do not involve fees upon purchase or liquidation, most 401k investors prefer them to load funds. Thus, most employers prefer to equip their 401k plan with no-load funds rather than load mutual funds. Thus, we focus our 401k investment discussions on no-load mutual funds, not load mutual funds.

-- All mutual funds, whether load or no-load, involve annual management fees and sometimes 12-b1 fees. These are automatically deducted from investors' returns each year. Certain transaction fees may also apply.

-- Each mutual fund family, whether load or no-load, offers a spectrum of investments, from a money market fund to potentially more volatile, potentially more lucrative, stock and bond portfolios, to meet varying risk-return scenarios.

-- Choosing no-load mutual funds for your company plan means contributions to your employees 401k accounts won't be diminished by any investment purchase or liquidation fees; the full amount makes it into the investment.

-- Using no-load investments generally means relatively low 12b-1 fees for your plan's participants. Your participants keep more of what they invest, increasing the compounding growth potential of their accounts.

Again, because of the lower fees involved, no-load mutual funds are generally preferred over load mutual funds by 401k investors. If, however, your company prefers to offer a family of load mutual funds as its 401k investments, we can certainly accommodate you. Simply contact us for a listing of potential load mutual fund families — and remember, whether it's load or no-load mutual funds that you're considering, make sure you and your 401k investors carefully read the investment prospectuses so you're aware of any and all fees before allocating any money to the investment. Prospectuses are most readily available through the mutual fund company, whether by mail, e-mail or online. Use the contact information offered in our Potential 401k Mutual Fund Investments listing.


[topic 3]

With 401(k) Easy, You Can Select a Family of No-Load Mutual Funds Or Offer the Family of No-Load Mutual Funds Plus Self-Directed Brokerage Accounts

As discussed above, mutual funds are the number one choice of 401k investors, and most 401k investors prefer no-load mutual funds to load mutual funds.

With self-directed brokerage accounts your 401k investors have access to all types of mutual funds as well as to stocks, bonds and other types of investments (visit our Self-Directed Brokerage Accounts page for details). So are self-directed brokerage accounts more desirable for your 401k than a single family of no-load mutual funds?

There are many reasons why employees might favor individual 401k self-directed brokerage accounts — the investment selection, the sense of hands-on control, the quick-access to account information. Other employees, though, might feel intimidated or overwhelmed by the extent of investment choice; they might prefer their employer having narrowed the field to a single family of no-load mutual funds that offers sufficient investment selection within a grouping small enough that investors can look at each fund carefully before choosing the one(s) that are right for them.

-- With 401(k) Easy, your company can offer either a family of no-load mutual funds or self-directed brokerage accounts — or both.

-- Go to a listing of potential no-load mutual fund families for your 401k plan.

-- Go to a listing of potential self-directed brokerage accounts for your 401k plan.


[topic 4]

Choosing a No-Load Family of Mutual Funds for Your 401k Plan

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.

-- Please also glance through the below comments on Risk, Return and Investing and the Frequent Trading of Mutual Funds.


[topic 5]

It's Easy to Get Mutual Fund 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 6]

A Few Comments About 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.


[topic 7]

A Few Comments About Trading of Mutual Funds Frequently

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 a bad idea. Studies confirm what has been suspected by professional money managers for years — namely, frequent mutual fund trading usually hurts long-term returns.

-- As reported in the Wall Street Journal (9/22/00, Lucchetti, Aaron, "Frequent Trading Worries Fund Firms"), a 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.

With 401(k) Easy you can discourage frequent trading by limiting your 401k investment selection to a single family of no-load mutual funds, because with such a designation your plan participants will need to submit an updated 401k Enrollment Form to change investment designations.

-- By offering a single family of no-load mutual funds PLUS self-directed brokerage accounts, which is also an option with 401(k) Easy, you leave the door open for more sophisticated investors to choose self-directed brokerage accounts and thus trade stocks, bonds and mutual funds whenever they see fit without needing to file any 401k Enrollment Form revisions while steering less sophisticated investors to the less intimidating, less complicated world of a single family of quality no-load mutual funds.


[topic 8]

Looking for a Mutual Fund Group We Don't Have Listed?

Contact us if you don't see the mutual fund group you want when you view the no-load mutual fund listings.

-- Call us at (800) 595-4015, or contact us via e-mail.

-- There's a good chance we can add your request to our listing!


[topic 9]

Mutual Fund Expense Fees

All "load" and "no load" mutual fund investment companies charge their investors annual management fees to cover the fund's operating expenses. Management fees cover such expenses as auditing, record keeping, administration, mailing of statements, advertising, providing telephone support, investment managers salaries, commissions to brokers, etc. Typically these management fees, which are automatically deducted from each investors account, range from a low of 1/2 percent to a high of 2 percent annually.

-- Some mutual fund investors have the misconception that management fees are set and regulated by the federal government, and that one company's fees are like another's. In fact, management fees are set independently by each mutual fund company. The impact of derivations in fees can be quite significant over time.

-- For example, assume a 10 percent return on an initial investment of $25,000. A mutual fund with an annual management fee of 1.3 percent will yield $31,700 LESS over 20 years than a mutual fund with a management fee of just 0.2 percent, all other things being equal. That's a lot of foregone retirement savings!

Information concerning a fund's management fees is always available by contacting the fund company or referring to the fund's investment 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]

Our Policy Regarding All Asset-Based Fees

We at Pension Systems Corporation, distributor of 401k Easy and 401k Easy Online, has always worked hard to keep 401(k) plans as affordable as possible for our clients, many being small and very small companies. 

We do not accept any rebates or revenue sharing of fees deducted from our clients' plan assets. Entities that provide and support 401(k) plan investments, include mutual funds managers, fund distributors, asset custodians, asset trustees, investment brokers and advisors, and plan administrators and record-keepers. These entities typically earn at least a portion of their compensation from asset-based fees deducted from plan assets. 

401k Easy is an exception to the norm in that we do not earn any compensation, either directly or indirectly, from our clients 401(k) plan assets. If rebates are offered, we instead have the rebates applied to reducing our clients' asset costs. Our published prices, available online for all to see, are the only compensation we collect.

Asset-based fees are an unavoidable fact of life if your company is using mutual funds or self-directed brokerage accounts for the 401(k). The cost of these asset-based fees must be included when determining the true, overall cost of a company's 401(k), By not collecting a portion of asset-based fees, and instead requiring that the fund companies and/or custodians apply these fees to keep overall costs down, Pension Systems Corporation is doing its part to keep 401(k) plans as affordable as possible.

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



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