401k Administrator

Do you know any brokerage firms that have become insolvent and where customers lost money that was above the insured amount?

Asked by CLZ79 over 10 years ago

It is very difficult to lose money if a brokerage firm goes bankrupt. The only way I have seen this happen in the US is through outright fraud when the money was taken from the client account before the company went bankrupt. I did learn an interesting thing during the Lehman collapse: apparently in the UK your money is locked up until the whole matter is settled. UK investors were left with an IOU far longer than US investors. 

Is it true that 90% of mutual funds don't even beat the S&P, and if that's true, I don't understand how the mutual fund industry and its 3% MERs hasn't been exposed as the single greatest fraud in modern finance(!!?)

Asked by beyo1988 over 10 years ago

I have seen those statistics, and these is a lot of truth to the idea, but let me note that it is not a complete apples to apples comparison.


First, I want to admit that I had to research the term "MER". Apparently this is a Canadian term for what Americans would call the "expense ratio". Expense ratios are what every investor should know before they commit one penny to any publicly traded investment (mutual funds, ETF, ETN, MLP - they all have them). They are listed online, and in the prospectus, but you may have to hunt a bit. There are plenty of online resources: Google finance, Yahoo finance, AOL finance, etc.

There is nothing I love more than an index fund and I recommend it at cocktail parties when people try to pry investment ideas from me (I am FUN at parties, really!). I like them because they are very low cost ways to get market exposure. But, even the investable index underperforms "the index" because the mythical index that we use as a benchmark has no costs associated with it. Over time this is a fantastic benefit and makes it hard to outperform. And please note! Index funds have lower costs than active funds and so over the long run you can see the same advantage.


Your main point is excellent and I do not want to skip that: are active funds the biggest swindle of the modern age (Modern Portfolio Theory is less than 100 years old)? Well, I can tell you it’s a swindle I would like to see less of, but there have been some fabulous swindles and I don’t’ think expense ratios will make the short list.


I don’t know what context your 3% MER is charged, but I will assume you are referring to some kind of pension scheme. In the States, the typical 401k participant is paying 2.5% - this is way, way more expensive than investing through other methods. The price takes advantage of the fact that people have no choice over the plan, that most people are highly motivated to participate and that the employer’s match will drown out the high fees.

 

What kinds of incentives do different fund administrators offer to employers to get them to switch their funds over to them?

Asked by telly over 10 years ago

Hi Telly,

That's a great question. I bet most people don't realize that their employer is incentivized to partner with a particular provider. I happen to administer the 401k for the employer (or the "plan sponsor" as they are called) and have been offered these incentives. 

The problem with these incentives is that they may influence the plan sponsor to pick a plan with the best incentive instead of a plan that is best for the participants. 

The incentives I have seen involve having the fees paid by the participants "swept" over to the third-party administrator. This directly reduces the cost of the plan for the employer as they would normally have to pay for this service. One could argue, at a high level, this is a wash for participants because it makes it more likely that employers will offer a 401k, but it can also create a problem if there are better plans that do not offer an incentive.

 

 

 

Can 401K plans go bankrupt? What if a plan administrator goes out of business? Is the money insured at all?

Asked by JRR over 10 years ago

Wow, another good question. And I thought people were going to ask me if they should buy gold and put it in the ground.

First, a 401k plan is nothing more than an IRS designation for a pool of funds. Think of it as a magic bubble that gets special tax treatment. A 401k is not insured because it can be empty.

If your plan administrator goes out of business, that will have no effect on your assets - the plan would just be transfered to a new administrator. Of course, if a plan administrator does a sloppy job then they may cause you to violate the IRS guidelines and you would forfeit your special tax treatment. That would be a major disappointment to the participants who were counting on the plan. I would be interested in hearing from others if they know of any plans that have recovered from this.

Assets held in a 401k are generally held in a SIPC insured brokerage account. Every 401k that I know of is either individual stock, ETF's or mutual funds. I do not know if an investor can invest in rare objects and real estate in a 401k (as they can for a routine IRA) since most 401k also have a company match and regular contributions making it a better fit for bonds and equities.

SIPC will cover up to $500,000 in securities and $250,000 in cash in the event that a brokerage firm becomes insolvent. In addition, most larger and well-known firms have a collaborative insurance plan to increase those levels to a much higher level. YOu should check with your institution if you have a large balance. Also, make sure you get an annual statement in paper form. If you ever have to collect from SIPC you will be very, very glad to have that.

Most people should worry more about getting as much money in there each year and not worry too much about it being insured. Each year, a wonderful "window of opportunity" passes if you are not making a contribution. 

What one or two things would you change about the retirement-planning industry if you could?

Asked by Karyn over 10 years ago

The biggest improvement has already happened! In August 2012, every 401k plan was required to start publishing the annual expenses (cost) to the employee. There isn't much more you can do besides show people what it costs and let human behavior do it's thing. How many people got the notice and did not read it? That's what needs to change.

After giving it more thought, I want to add a more concrete change: I think every 401k plan should be required to have at least one FDIC insured cash option and an index fund in each investment category (for example, MSCI index, S&P500 index, bond index and FTSE index).


 

 

 

Are any changes coming to traditional 401Ks as a result of the aging population, or alternatively because people are now expected to live for much longer than they were 40 years ago?

Asked by Germaine1 over 10 years ago

I keep a pretty close eye on industry changes, and that is not one that I have heard. At the moment, the IRS allows you to take pre-tax money and save it until you turn 70.5 at which point you must begin taking the money out (taxed).

The only changes I read about are pushed by progressive-minded strategist who would like to see the whole system dismantled (arguing that only the rich can afford to save this way) and replaced with a mandatory withholding from wages that would be invested with a guaranteed 3% return. So far this idea has not gotten traction, but if young people don't start using the 401k system (voluntarily) then it may eventually get replaced.

The one change that I have seen, as a result of people living longer, is the trend to keep money in the stock market after retirement so purchasing power is maintained.

 

 

I assume you're good with numbers, any tips on mental math? How do you avoid errors when a single digit can make a huge difference?

Asked by Anonymous over 10 years ago

I'm not really good with numbers, I am good with seeing "systems of value". I know how to get a dollar to dance with wolves ; ) 

If you have one dollar in a taxable account and it could be in a retirement account, you are losing value. That is not math, just sensible.

What are a few lesser-known tricks of the trade you think people with retirement accounts should know about?

Asked by JenD over 10 years ago

One of the better moves I see people make is opting for the ROTH option in their 401k instead of the pre-tax option.  This works best for young people as usual. If you have some reason to keep your income down then the pre-tax is better, but for most people the ROTH is a pretty good move.

 

What do you think of people who advocate "dying broke"? i.e. spending most of their remaining funds while they're still alive to see it and enjoy it, rather than just stockpiling it all to pass on to their heirs?

Asked by carefree over 10 years ago

I am a huge fan of dying broke ; ) 

Of course, it is a lot like Pascal's Wager - you can either die with extra money or live past your resources. You decide which problem you would rather have.

 

At the risk of sounding heartless, what do you actually DO on a day-to-day basis? Once the company plan is in place, and contributions are rolling in, what is there for an in-house administrator to actually administer?

Asked by Elie1234 about 10 years ago

Hey! Don't clue the boss in! I'm getting really good at Flappy Birds and the gig is up if he realizes I'm just a 401k meme. 

Actually, the 401k is only part of my job, I also run the other benefits. But, an in-house admin has a lot to do besides look good. I help participants navigate their investment choices (remember, once you give them an open platform then the world is their oyster - and, new money is coming in each pay period.); I make sure we fulfill all the ERISA requirements (like fee disclosure and getting people to designate a beneficiary); and this time of year I have to fill out all the paperwork for our TPA to be able to file the mandatory 5500 filing with the government.

TPA's (third party administrators) probably also call themselves 401k administrators and they keep busy because they have so many clients. My work is more diverse but I know enough about it that I thought I could share the inside scoop.

If someone found this work interesting they would probably gravitate to the CFP program and work as a financial advisor.

Thanks for asking.

Do employees at your company ever blame YOU if their retirement investments don't perform to their expectations:)?

Asked by Jen over 10 years ago

LOL, that's a good question! Since we use a brokerage platform, and therefore they can buy anything they want from cash to gold, it would be hard for them not to take personal responsibilty for their choices.  Most of them are just happy when the balance goes up.

I find myself having to Google how IRAs, 401Ks, Roths, work a couple times a year just to relearn all of the nuances, and it's frustrating each time. I like the tax advantages, but do you agree that it's all way too complicated for the avg person?

Asked by Bearz1 over 10 years ago

Absolutely not. I compare it to driving a manual transmission. Most Americans think that it is too hard to drive a "stick" because they have not real incentive (as they can just drive an automatic). 

It is not easy for young people to take the time to plan ahead, especially when they feel like there are so many unknowns. I have heard that one firm is using age-progression to help young people think of themselves as old. 

I have the same chat with people in their 40's all the time: "If ONLY I had started younger!". Oh well, the wisdom of age ; ) 

 

How much did you save on fees by moving to the brokerage platform? And why is it so much cheaper?

Asked by TD over 10 years ago

I will have to come back later to give a better answer, but basically you are removing several layers of "middle men" (high margin middle men) and you are essentially deregulating what people can invest in, more choice means the consumer can buy cheaper product. 

There are exceptions - I have seen some large, union-organized firms with fabulous plans. Maybe they are so big or prestigious that they good a good deal or maybe someone negotiated a great deal for the employees.

Why do retirement plans offer so few investment type choices? Are there laws that prohibit trading options and other derivatives with retirement funds? My old employer's plan didn't even let us buy stocks; only boring mutual funds.

Asked by lAURA about 10 years ago

Hi, this is a good question. I imagine that a lot of people eagerly open their paperwork or log on to a web site expecting to see a great list of investments only to be disappointed by a list of odd-named mutual funds.

First, a clarification. If you are able to invest in mutual funds then you are also investing in stock. Mutual funds are groups of stocks - usually grouped by a particular characteristic (like: large companies or foreign companies). It is a good idea to have a mutual fund (or ETF) if you have a small amount of money. 

Why is the selection so limited? I assume it is to save money. The more choices then the more work to reconcile. More work means less profit. There are laws to make sure that some minimum number is offered, but usually the choices are still really unsatisfying.

By your comment, I assume that you wish you had a brokerage platform 401k instead of a mutual fund based plan. That is a very smart wish! I don't want to name any names, but (insert large mutual fund company name here) allows 401k participants to convert to a brokerage platforms once they have about $3000 in the account. I would recommend scrolling all the way to the bottom of your "overview" and read the tiny print. If you see any hyper-links to brokerage then your plan may have that option.  You will have to fill out some separate forms.

Once you are in brokerage nirvana, ERISA (the governing framework for retirement plans) will still have limitations. You can buy and sell any normal exchange traded security but you cannot write options if you do not own the stock.

Since many derivatives/options have the potential for large loss, the only one allowed is a "covered call".

So, you could "write a call" on the 100 shares of IBM that you own but you cannot "write a call" on the Facebook shares that you do not own.

Best!

 

I liked the fund that I was invested in via my work 401K, but then they changed plan administrators, and say they put me in an "equivalent" fund with the new admin, but I don't like it; is there any way of getting back to the fund I had been in?

Asked by Dor1 over 10 years ago

Remember hanging out with your friends and negotiating a baseball card swap? You'd analyze the merits of Jeter vs. Sosa vs. Griffey Jr. and slog it out until everyone was satisfued that a fair exchange had taken place? 

Well, it's not like that.

When an employer switches plans, it is usually because they are reducing costs (either overhead or real fees). Plans are sold on the basis of costs and ease of transition from the old funds to the new funds. Great liberties are taken to squeeze size 10 feet into a pair of size 8 shoes.

Once the swap is made you cannot go back to the old mutual funds. But, happily, you are always free to complain to the HR person. Look over the expense ratios of all the funds and then invest in the lowest cost funds of the strategy that you want.

 

Is there a 'sweet spot' for putting funds into a 401K that maxes on tax benefits for an individual?

Asked by Pi over 10 years ago

The short answer is NO. There may be reasons to decide between a ROTH and an IRA option, but you should try to maximize both.

Each year, an individual under 50 can put away $17,500 and over 50 can put away $22,500. The earlier you start the more likely these amounts will actually do the trick.

 

What is the best way for a non financial person to learn the basics of funds? I put money away into my companies 401K, and my company has changed plans several times due to mergers.

Asked by Pi over 10 years ago

I think the first thing "non-financial" people have to do is unlearn the idea that they are non-financial. Everyone tries to maximize their resources, everyone. For some people, that means that they want a lot of friends; and they are willing to have less money to have more friends. Other people want as much money as possible. Most people fall in the middle.

The best economic decisions are made when you have the right amount of information and it is information that you have high confidence in.

Of course, this is true for any decision you make. All decisions are subject to risk - do I fly? do I ski? do I live in an commune?

The only difference I see, between people who self-describe as "financially savvy" and those that are financially nervous, is the comfort they have in understanding the risk and taking the risk.

Now that I have beaten you about the head and patted you on the back, let's talk about educating yourself on the risks (and remember, if being 75 and broke is not a worry for you, then maybe you don't have as much risk as someone who would like to be able to travel, or eat out, or ...eat).

There are some great web sites that can help you learn the language and get some ideas about how IRAs, ROTH, and 401k work together.

I like Vanguard (or better yet, just call them and chat away with a helpful person on the 800 number) and the Boglehead wiki and Scott Burns. Scott had been a syndicated writer for years and more recently started his own firm so he can manage money for people (full disclosure - we don't know each other). I like to read his blog. 

Start somewhere and just learn a little every month or so. If our parents could learn how to use a microwave, then you can learn how to invest sensibly.

 

When fund companies make a fund available for a company to offer their employees in their 401K plan, is it exactly the same fund that the general public can invest in? Are the fees higher / lower / the same?

Asked by Gaelin about 10 years ago

The short answer is “yes” but as a more expensive “class” of shares. But I’m not known for my short answers, so: mutual fund companies see 401k plans as a constant stream of new money that trickles in over the year. It is handy for them to have that flow go into their mutual fund products because it provides liquidity for redemptions (so they do not have to sell an asset).


It is cost effective for a fund company to use the existing line-up of mutual funds already in existence because most 401k plans are too small to justify investing the money separately. This does not mean that there is anything wrong with the investment choices, but it can be very difficult to figure out what fund you are in and check out the holdings (and turnover!)


For example, someone may have a fund named The Bradford H. Puffinhouse III Fund that owns all the S&P 500 stocks. It is possible that they have it listed in a 401k as The Large Cap Diversified Fund because it helps participants understand what it is.


On the other hand, I have also seen funds with a very close name but with a different class. Since it is so hard to find a TICKER on a 401k, all you can really do is type most of the name into a search engine and see what comes up. Once you have a ticker you can find all the other “classes”.


Many mutual funds come in various classes. Even if is the same “pool” of money the cash flows are broken into classes so that fees can come out according to the class. So, the “A class” might be for people who call the 800 number and buy shares over the phone (not 401k) or through an online account and do not pay any other fee than the expense ratio. The “B Class” might be for a people who buy through a salesman and he gets a 5.75% commission that comes right out of your balance (which means you have to be up 6% just to get back to your initial investment!) and the “C class” might be a fund that charges you to get out. Different products for different markets. They are usually named with the class in the ticker, so you might see NAMAX, NAMBX, and NAMCX as names for the same mutual fund. All mutual funds end in the letter X.


A 401k will generally be a class that is a more expensive than the simple fund. I encourage people to stick with index funds in a 401k because it is harder to make those very expensive. Use money outside your 401k to augment a “core” holding – for example, buy an emerging market fund outside your 401k if the one in your 401k is more expensive than normal.

What are the economics that go into a company deciding whether they're going to MATCH employee contributions? Are there incentives for companies to do so other than employee morale?

Asked by TravisMarks about 10 years ago

The match is a feature that has gotten less common since the Great Recession. 

Early on, I think the match was a way to get people in to the plan and it was somewhat expected by employees. There are tax incentives for the firm, but most smart firms don't let the "tax tail" wag the dog so I don't know how powerful that really is.

Also, remember that most plans get set up by people that may not know very much about investing. If you build submarines (and you want to spend your time building subs and not worrying about benefits) you are going to expect your benefits-broker to "have your back" and recommend a good plan. It is frustrating, but most salespeople know sales, not investing.

Because the fees are so high in most of these plans, brokers have an incentive to push for a match so participants don't notice how much of their money is getting syphoned off in fees.

Happily, the IRS-sanctioned 401k us such a great idea that you don't need a match to make it a fabulous investment (especially if you choose the ROTH option). Of course, that assumes you have a low fee plan.

Best!

 

i'd like to have a current 401k rolled into a new roth 401k. i already paid the tax on it thru payroll, but TD Ameritrade says they cannot administer it. can i have an administer and then self-direct my roth 401k?

Asked by keny2 over 7 years ago

I'm 55 on full disability. I have about $20K in a 401k. Could I take it out without tax penalty? What about annuities for extra income? What would you do? Thanks.

Asked by mcmjuly over 9 years ago