“What is fiduciary responsibility and why is it so important!”

By Mark Folgmann

A Fiduciary is someone who occupies a position of special trust and confidence. The sponsor of your 401k holds this position and their sole purpose is to protect and secure your families retirement income. This responsibility involves many parts such as selecting advisors, cost analysis, evaluating conflicts of interest, implementing a fiduciary process and ensuring a successful retirement outcome. Unfortunately many fiduciaries are not fulfilling their duty and are incorrectly assuming their advisors are sitting on the same side of the table and sharing the risk.

You must start by asking your advisors if they accept fiduciary responsibility, in my opinion this is the most important question you will ever ask your advisor. Most firms and advisors operate under the suitability standard and that does a great job protecting the advisor and his firm but does not protect you the client. Fiduciary advisors must act in their client’s best interest so make sure you get confirmation in writing. You can learn more by visiting www.focusonfiduciary.com. Employees depend on their plan fiduciaries to be knowledgeable and implement a process that will protect their family’s retirement income. Based on the current status of our 401k plans we need a wake-up call to plan sponsors. Remember the interest of the financial service industry is diametrically opposed to the American worker whose retirement funds they have been entrusted to invest. Every dollar of cost reduces your retirement account by an equal dollar. Plan sponsors can learn more by registering for our February 25th NMC class from 1-4pm “Understanding your 401k” at 995-1700.

Next time: What the financial service industry does not want you to know (conflict of interest)

“Why You May Loose Half Your 401k to Fees”

By Mark Folgmann

Probably not the best time to bring up fees in your 401k since many account values are already down 40 or 50%. In order to get maximum recovery when the economy improves it’s imperative that you pay attention to cost within your plan. As I ask people what their cost are within their 401ks I usually hear that there is no cost or my employer pays the fee. This simply is not true; you always pay virtually all the cost. The industry is masterful at hiding and concealing these fees a lot like the line in the Wizard of Oz when they say “Pay no attention to that man behind the curtain.” At last count there are 14 ways to hide fees and those fees can eat as much as 50% of your retirement balance over a 40 year career.

This seems to be impossible but remember two things, first fees come out each year whether you make money or not and second the compounding effect is one of the most powerful forces in the universe. A 25 year old saving $400/month with $200/month employer matching would accumulate $2.8 million by age 65. This illustration assumes a 9% portfolio growth rate and zero investment/plan cost, neither very likely, the typical small business plan (plans with assets less than $20million) I review has total carrying cost of 2.5- 3.5%. If I run the same illustration assuming a 2.5% total cost/yr in fees the accumulated balance at 65 becomes $1.37 million, which is a reduction of 52%. Now it is unrealistic that we have a plan with zero cost but we would make a lot of progress if we first understand that there is a cost and we as participants are paying the bill. Once we realize we have a problem we can determine exactly what it is costing. I say that with tongue in check since it’s extremely difficult to find all the fees since currently there is not a requirement of full disclosure. My personal belief is your complete plan cost should not exceed 1% and you should have a goal of .75% or less and this should include all fund expenses, record keeping and advisor fees. Your employer has fiduciary responsibility to review plan cost and make sure they are reasonable and competitive.

The Department of Labor is currently working on increased requirements demanding full fee disclosure that should take effect later this year. Many 401k plans with high fees are scrambling to replace current plans with lower cost plans prior to the new disclosure rules taking effect. You can visit my website at www.arkadvisor.com for a 30 minute free video on Hidden Fees under the 401k Pension Consulting Page and as always to can e-mail question to me at mark@arkadvisor.com. Our next article will be addressing Fiduciary Responsibility for employers.