The 45 Minute 401(k) Review For Plan Sponsors

As a business owner, CFO, HR Director you have a million things on your mind. With many pressing needs grasping at your attention, it's no surprise you haven't quite gotten around to completing that long overdue review of your company's retirement plan. You’re busy! I totally get it! To help, we've outlined a few steps that can get you through a review of your plan in as little as 45 minutes.

 At a minimum, retirement plans should be reviewed at least once a year. Why? As a fiduciary, it is your responsibility to make sure your plan meets all federal requirements and is maintained to keep your employees' best interest at the forefront. Failure to do so could result in hefty fines and penalties and leave you open to legal actions by plan participants...Elite Universities Sued Over Retirement Plan Fees

#1 Obtain your plan documents (5 Minutes)

You'll need the most recent version of the following documents:

  • Adoption Agreement
  • Fee Disclosure Statement
  • Investment Line Up

These documents should be readily available through your plan provider or third party advisor.

#2 Know your plan (20 Minutes)

The adoption agreement is the heart and soul of your 401(k) or 403(b) plan. Doing a quick scan and summarizing the provisions will help you identify anything you might want to consider amending. If it has been a while since your plan was established, pay close attention to items such as the type of contributions allowed, company matching formula and vesting schedules. As companies evolve, so to should the aim of its employee benefits. Further, you may find that you are paying additional administrative fees for customized plan provisions that are no longer necessary.

#3 Know your fees (10 Minutes)

One of the most important fiduciary duties you have as a plan sponsor is understanding the costs embedded in your plan. A quick look at the Fee Disclosure Statement and Investment Lineup will give you an idea of what the plan is costing you, the sponsor, as well as individual plan participants. Retirement plan fees are notoriously complicated. They are charged as flat dollar amounts and as a percentage of plan assets. We suggest itemizing plan expenses in a simple schedule that includes the following categories.

  • Record Keeping and Administration
  • Asset Custody
  • Investment/Fund Expense
  • Third Party Advisor

Knowing the sum of all fees will help you benchmark your plan’s costs. Remember that cost efficiency is extremely important in keeping with the best interest of plan participants. 


#4 Know your investment performance (5 Minutes) 

This can be an intimidating process for many plan fiduciaries but a quick glance at the investment line-up report will allow you to accomplish two things, 1) confirm that a diversified list of investment choices in multiple asset classes is being offered, and 2) see which are keeping pace with their performance benchmark. To analyze your plan’s investment performance, compare each investment’s long-term (5, 7, 10-year) performance against its stated benchmark. If you highlight investments that are consistently underperforming, it may be time to boot them out of the plan. 

#5 Write it all down (5 minutes)

By this point you've identified important plan amendments that could save your business money, protect you from regulatory risks, and enhance the total benefit to your employees. Put these observations in writing and create a plan with actionable items. Taking an organized, well-written plan to your provider or advisor will significantly help in implementing the necessary changes.

If you do not have an advisor or are interested in obtaining objective feedback regarding your company's current retirement plan, contact rofolio and we'll gladly review it with you at no cost.

The Glaring Flaw in the DOL’s New Fiduciary Law

The Department of Labor is essentially saying that fee considerations don’t factor into looking out for the best interest of a client. This is the glaring flaw in the new fiduciary law.

 The White House yesterday, released a fact sheet touting the benefits of newly implemented fiduciary standards designed to protect retirement savers and retirement plan sponsors from costly practices employed by many brokers and advisors. Click herefor the full release and see my previous post detailing why the reform is needed.

 The new law created by the Department of Labor, while well intended, falls short of the sweeping reform it claims to be. Subsequent amendments to the originally proposed law include some noticeable exemptions. Exemptions that leave the consumer exposed to the same sales practices the law purports to protect them from. Most prominently is the “Best Interest Contract” exemption.

“BIC” Exemption

In short, the exemption enables an advisor to continue to receive “most common forms of compensation”, such as sales loads and commissions, when recommending an investment. The advisor is simply required to disclose the conflicts of interest to the investor and show that the investment is in the client’s best interest. The trouble is that considerations of fees are inexplicably excluded from the Department of Labor’s definition of “best interest”.

 The reality of the “BIC” exemption suggests there won’t be any real material change to the sales practices used by commission based brokers and advisors. What has changed is the broker can now legally tell their client they are a fiduciary, looking out for their best interest, all while charging excessive fees for poor performing investments.

 The Contradiction

The White House release boasts that the new law will crackdown on a “broken regulatory system that allows misaligned (broker) incentives to steer customers into investments that have higher fees or lower returns.” A system that has dragged down returns on retirement savings by an average of 1%, taking an estimated $17 billion out of the pockets of retirement investors every year.

In stark contradiction to the spirit of the new law, Labor Secretary, Thomas Perez admitted to reporters that, “Best interest does not mean the lowest priced product.”  The Department of Labor is essentially saying that fee considerations don’t factor into looking out for the best interest of a client. This is the glaring flaw in the new fiduciary law. 

Our Conclusion

The new fiduciary standards contain some meaningful reform, which will hopefully prove to be of some benefit to consumers. While a step in the right direction, it by no means absolves consumers from their responsibility to understand the investments they own and how their advisor is being compensated.

We maintain that the best way for individual retirement investors and retirement plan sponsors to look out for their best interest is to utilize independent Registered Investment Advisors that receive no commission or other forms of compensation from investments that they recommend.

Profolio Investments, Inc. is a Registered Investment Advisor located in Jersey City, NJ. We provide wealth and retirement planning for individuals, small businesses, and retirement plan sponsors.

Why I Love My Job as a Registered Investment Advisor

The fiduciary standard required of an RIA is the “better and best” way to make sure a client’s needs come first.

There are good jobs and then there are great jobs. I even suppose there are bad jobs, which I could but would rather not discuss! I used to have a good job. I liked my job. My career as an investment representative started with a large broker/dealer. My employer offered endless resources and an established reputation. It was an impressive organization where I gained an understanding of financial markets and learned how to develop meaningful client relationships.

But, after 11 years I found myself questioning whether or not I loved going to work each day. While I was proud of the professional services I offered to my clients I recognized there were limitations presented by my employer. I felt my clients could be better served with a more objective and unbiased perspective.

Making the Move

Having establishing Profolio Investments, a Registered Investment Advisor firm a little over a year ago, I’ve discovered what I’d hoped for. That my clients are better served from the autonomy and independence of an RIA. Every decision that I make is now based on the single question, “What is best for the client?” Starting an RIA has come with its share of challenges but it has given me an incredible sense of fulfillment that was missing before. Without a doubt I love my job as an RIA.

Broker/Dealer vs. Registered Investment Advisor

What many don’t know is that a very different set of regulatory standards apply to investment representatives depending on whom they work for. In one category are Registered Representatives who are employed by broker/dealers. Broker/dealers are the large household names that come to mind when you think of investment firms. They fall under a set of standards known as suitability. In the other category are Investment Advisor Representatives who work for Registered Investment Advisor firms. RIA firms come in all shapes and sizes, ranging from one man shops working with a handful of clients to those with many advisors managing billions in client assets. The important distinction is that an RIA falls under the fiduciary standard.

Suitability Standard

The suitability standard is regulated by FINRA, the Financial Industry Regulatory Authority. It requires broker/dealer firms to gather pertinent information about their clients which enables them to recommend investments that are suitable to an investor’s specific circumstance. It factors in such things as age, risk tolerance, investment experience, and tax status. All very good points to consider before recommending an investment.

Fiduciary Standard

But, if suitability is a “good” way to ensure client’s needs are met then the fiduciary standard required of an RIA is the “better and best” way to make sure a client’s needs come first. The fiduciary standard was born out of the Investment Advisors Act of 1940 and is administered by either the SEC or an individual state’s securities regulator. In short, an advisor acting in a fiduciary capacity must put a client’s interest before anything else, most importantly, before the advisor’s own interests.

What does it all mean?

You can think of it this way; a broker/dealer can satisfy suitability if it recommends to its clients the least suitable investment from a list of suitable investments. For this reason broker/dealers will typically recommend investments managed by their own firm even though a better alternative may be available elsewhere. An RIA on the other hand, is required to consider additional factors such as fees and commissions and recommend the best overall investment option to their client.

As an investment advisor, I now enjoy more independence and objectivity than I did before. The strategies my clients and I create together don’t have limitations. I am able to bring together the best solutions possible. Instead of just focusing on meeting my client’s needs, I can focus on putting their needs first. My compensation is no longer tied to mutual fund fees and pricey investments. It is tied to the effort that goes into getting to know my clients, going the extra mile, and putting their needs before my own. It’s this new focus that’s helped me move from a job that I like to a job that I love.

Tis the Season - A Year End Financial Checklist

Yep, it’s really December! Crunch time to knock out the last few items on your financial checklist. To help, we’ve put together some of the things to consider both prior to and shortly after the end of the year.

Before the ball drops:

Set a Budget for Holiday Expenses

I said it, the “b” word. Keeping within a budget can be a challenge, but doing so will help you avoid a financial holiday hangover. With spending on gifts at an estimated $900 per shopper, your own budget should be well within your means.

Make Charitable Donations

This one’s a no brainer. Help those in need while lowering your taxable income. For additional tax efficiency, use appreciated stock for your gifting plans. You can also receive a charitable deduction by donating household items and clothing.

Realize Losses

You’ve just feasted on your Thanksgiving harvest, now it’s time to harvest (realize) losses in your portfolio. If you have taxable capital gains, harvesting losses can help you lower or eliminate the taxes you owe. Use up to $3,000 of excess capital losses against your ordinary income and carry forward any losses beyond that amount indefinitely. If you’re replacing any sold positions keep in mind the wash sale rule.

Take Your Required Minimum Distribution

If you’re over age 70 ½ and have qualified retirement plans, forgetting to take your RMD can be a big mistake, possibly costing you a 50% tax! However, if your only retirement account is a Roth, relax and enjoy another glass of eggnog. Roth IRAs are exempt from the RMD rule.

Use the Gift Tax Exclusion

If you’re in the position to help family members or friends, have the need to lower your taxable estate, and the holiday spirit has you in a giving mood than consider making gifts before December 31st. The annual gift tax exclusion allows for gifts of up to $14,000 to any number of individuals without affecting your lifetime gift tax exemption. If you’re married, double your gift to each individual to $28,000.

Accelerate Deductible Expenses

Maybe you knocked it out of the park this year with your bonus, or as a business owner your revenue was through the roof. If you find yourself in a higher than normal tax bracket this year, consider prepaying next year’s deductible expenses prior to December 31st. For individuals this may include making next year’s charitable donations early or pre-paying estimated taxes. For business owners it could mean pre-paying annual subscriptions, rents, utilities, or any other number of expense items.

After the ball drops:

Replenish Cash Reserves

It’s recommended to stash three to six months of living expenses away in a cash account. If you had to dip into these savings for any emergency expenses or for this year’s retirement contributions make sure to bring your cash reserve back to an adequate balance. You can do this by liquidating investments or implementing a savings plan from your income.

Review Asset Allocation & Rebalance Portfolio

Mental note! This one is important. Schedule time with your advisor to discuss the risks in your portfolio. Stock valuations are at historical highs and bond prices will surely be affected by rising interest rates, likely creating an environment for choppy returns through 2016. You’ll want to be sure your investments are in line with your risk profile.

Make IRA Contributions

If you spent the better part of December wrapping presents and forgot to make your retirement contributions, don’t sweat it. The deadline to make contributions to individual retirement plans extends to the April 15th tax deadline (and to your extension deadline for SEPs and Keoghs/Individual 401k). January is also a great time to work with your advisor to set up an automated deposit plan. Automating your contributions on a recurring basis is both convenient and has the benefits of dollar cost averaging.

Increase Contributions to 401k

Hopefully, all your hard work this year earned you more than a pat on the back. Work a raise or bonus into your new budget and up the amount you are contributing to your 401k. Apparently, only 1 in 5 Americans are very confident they will have enough for a comfortable retirement.

Rollover Your Old 401k

Make that old company 401k that has been nagging you since you left your last job a part of your New Year’s resolutions. Rolling over into an IRA will greatly expand your investment options, give you more control of your retirement, and could possibly lower your investment fees. If you have an existing IRA, consolidating accounts will just make your life easier.

Update Beneficiary Designations

The good news is you probably won’t die in the coming year…but if you do you want to make sure your assets are transferred according to your wishes. Double check beneficiary info for all of your financial assets including life insurance, retirement accounts, bank accounts, other transferable assets, and make any necessary changes. This is especially applicable if you were recently married, divorced, or had children. Assets with a beneficiary designation transfer quickly and bypass the legal probate process, greatly simplifying the administrative burden on your loved ones.

Dust Off Your Estate Plan...Or Consider One

A well-designed estate plan is one that is malleable and can be updated as personal or external circumstances change. Reviewing your plan documents with your advisor each year will help you keep the plan up to date. If you don’t have a plan or don’t feel your financial circumstances require a plan at least consider the essential components such as a simple will, forms of will substitute (beneficiary designations), and financial and medical powers of attorney.

Happy Holidays and here’s to a prosperous New Year!

ETFs – A Light Bulb Moment for Investors

How many stock brokers does it take to change a light bulb? There’s nothing like a good light bulb joke to point out the inefficiencies, redundancies, and over thinking that takes place in most professions. The question we’ve been asking ourselves as investment professionals more and more is “How many portfolio managers, research analysts, and traders, does it take to underperform the market?” Unfortunately, for investors holding actively managed mutual funds and separate accounts in their portfolio this is no joke.

Each year the S&P Dow Jones Indices analyzes the returns of fund managers versus the performance of their respective benchmark. The latest results from year end 2014 highlight what has been the trend since they began publishing the report 11 years ago; that the overwhelming majority of funds underperform.

Profolio Investments prefers to use an indexing approach to better help our clients reach their short and long-term objectives. In our view, it is far more important to manage risk in a portfolio than to pick stocks. In this regard, we are frequently asked about the benefits of Exchange Traded Funds (ETFs).


Like mutual funds, an ETF is a diversified portfolio of securities. Underlying securities within an ETF can include stocks, bonds, foreign currencies, commodities, or exposure to other assets such as real estate.  The majority of ETFs are designed to track the performance of a market or sector index. Examples of such an index would be the S&P 500, Dow Jones, or Russell 1000. As the index performs, so should the ETF. A well-designed ETF will have nearly identical returns as it’s underlying index, measured by what’s known as it’s tracking error. The fund holds only the investments that are within the index. There is no active buying or selling of securities which is why they are often referred to as being “passively managed”. This is in contrast to a mutual fund that is actively managed by a team of individuals made up of portfolio managers, research analysts, and traders.

Lower Fees

Because Exchange Traded Funds are by design much simpler with less overhead, they come with a significantly lower price tag. The average annual expense for an equity based ETF comes in around 45 basis points (0.45%) while equity based mutual funds on average charge a much higher 1.42%. Even further, investors can find many major broad based index ETFs at a fee of less than 15 basis points. In all of Profolio Investments’ ETF based model portfolios, we’ve been able to target an ETF expense of under 0.25%. Savings of over 1% per year in fees can have an astounding impact when the long term compounding effect of an investment portfolio is considered.

Highly Liquid

Another defining trait of ETFs is that they are tradable through market exchanges (like the New York Stock Exchange), as their name indicates. This means they can be bought or sold throughout the day in the same way you would buy or sell a share of stock. Investors thus have the benefit of being able to place multiple order types including market, limit, and stop loss orders. With many ETFs, trading call and put options is also a possibility. One consideration here is that due to it’s dependency on active markets, ETFs can trade at prices that differ from what is know as its Net Asset Value (NAV), or the combined value of it’s underlying investments. For most highly traded broad based index ETFs this premium or discount to NAV is negligible. ETFs are also subject to brokerage commissions when traded through most brokerages. However, clients of Profolio Investments are able to trade ETFs within their portfolio commission free.

Tax Efficient

Tax efficiency is another characteristic associated with ETFs. Because there is very little trading in and out of securities, it is rare for an ETF to make capital gain distributions common with most mutual funds. Additionally, when the owner of an ETF sells their shares, they go to a buyer in the open market. Thus underlying securities in the fund do not need to be liquidated like they do when an investor redeems shares of a mutual fund, again avoiding the need for the fund to pay capital gain distributions. As far as dividends go, as long as an underlying holding in an ETF pays a qualified dividend (qualifies for a reduced tax rate), the dividend is distributed to the owner of the ETF as a qualified dividend, assuming applicable holding periods have been met.

Other Considerations

Since the early 90’s, hundreds of Exchange Traded Funds have been created that essentially cover all sectors of the market. Diversified investment portfolios can be easily created using ETFs that cover investment grade and high yield bonds, US stocks, international and emerging market stocks, and alternative investments including commodities, and real estate. They can be purchased in any account form, both taxable and non-taxable (such as an IRA), that facilitates trading in stocks. With all of the advantages of index investment strategies it’s easy to understand why ETFs continue to capture market share from actively managed funds.

However, as the popularity of ETFs has grown, and the number of available funds expands, investors need to understand that not all ETFs are created equal. The market has been introduced to a number of funds that may not be as transparent or straightforward as the more common broad based index funds. Fund types identified with “Leveraged”, “Inverse”, or “Alternative” to name a few should be deeply understood prior to being incorporated into a portfolio. As with any investment it’s imperative to understand the nature of the investment and how it fits in the context of a broader portfolio.

Profolio Investments is a full service investment management and wealth advisory firm. We can help you implement a smart investment strategy suited to your objectives…and in case you were wondering, the answer is 3. One to buy a call option on a new light bulb, one to pretend the broken bulb is okay and to sell it to a client, and one to charge a commission on both trades.