It Pays to Outsource Your 401(k) Plan
The Benefits of Experience
As a business owner, you know that offering a 401(k) plan is essential to attracting and retaining the
quality employees you need to build your business. But making sure you’re getting the best out of your plan is equally important—for your employees’ retirement, and your own.
Young companies rarely have the expertise in-house to assess a plan’s quality. They often end up with plans
designed by individuals with no experience picking mutual funds, or by outside brokers whose incentives aren’t aligned with the plan participants and who don’t monitor the funds in the plan on an ongoing basis.
That can leave you with a 401(k) plan riddled with underperforming and expensive fund options. Smaller
plans may also charge additional recordkeeping and advisory fees. Not only will that hurt your plan’s performance, it can also put you at risk of a lawsuit: Companies that sponsor 401(k) plans can be legally liable if they have expensive or imprudent investment options in their plan.
The Importance of Selecting Great Funds
Within U.S. large-cap funds over the past 20 years, the difference in returns between the top-performing and the bottom-performing mutual fund each year has averaged a whopping 60%. That means the selection of the funds in your plan can have a drastic impact on the performance of your investments. For example, over the past three years, the topperforming large-cap fund averaged an annual gain of 45.8% while the laggard of the group lost 5.1%—a 50.9% gap!
Of course, any fund that performs exceptionally well over a short period may be more lucky than good—and
that can make picking the best performing fund each and every year nearly impossible. Long-term outperformance is a different matter. At Adviser Investments, we believe that over time, fund managers who are truly skilled can be identified. And avoiding expensive funds run by underperforming managers is a critical ingredient for building wealth. For example, from 2017–2019, the difference between the top and bottom quartiles of mutual funds was more than 11%. For an account worth $100,000, that can mean a difference of over $11,000 over three years! Selecting great mutual fund managers, or at least steering clear of chronic underperformers, is one surefire way to improve a 401(k) plan.
We invest in a 401(k) because we want to make money. And the less we pay in fees and expenses, the more we get to keep for retirement.
First, the good news: With the advent of low-cost passive investing, average expenses in mutual funds have been dropping. The bad news? Plenty of 401(k) plans are still chock-full of overpriced funds.
Take passively managed funds like index funds. Since they are not trying to beat the market, their entire focus can be on keeping costs low. Unfortunately, even some of these passive strategies are wildly expensive.
For example, there are numerous strategies that try to replicate the performance of the S&P 500. All of these strategies essentially buy the same stocks within the S&P 500 index, so they are virtually identical in terms of holdings.
Their costs, however, are quite different. While Vanguard 500 Index charges as little as 0.01%, Rydex S&P 500 charges up to 1.68%—over 160 times more expensive than Vanguard’s similar fund!
Set It, Don’t Forget It!
At Adviser Investments, we believe that finding good funds and sticking with them can lead to better returns over time. But when it comes to fund management, it’s important to follow Ronald Reagan’s famous dictum: Trust, but verify. Star portfolio managers can retire, leaving their former funds less desirable. New or lower-cost strategies come online that weren’t available before. Retirement laws change. All of these developments require a professional with experience managing qualified retirement plans. Even a well-designed plan with carefully selected funds can devolve over time if left unmanaged. It is critical to have someone monitoring your plan for potential improvements and pitfalls on an ongoing basis.
The Role of the Qualified Plan Adviser
The benefits of tax-deferred growth for retirement are difficult to ignore. Both employer and employee can be much better off with a professionally managed plan.
A plan adviser can add value in a number of ways:
- Evaluate an existing plan and recommend better investment options if available. A plan adviser can also compare different record keepers and custodians to determine if it is worth switching to a new provider
- Monitor the investment landscape to identify new mutual funds that should be added to the plan’s investment
- Update model portfolios of mutual funds within the plan so participants can maintain a diversified, risk-balanced investment strategy.
- Educate and work with individual plan participants to formulate an investment strategy appropriate for their personal 401(k) account.
Despite the complexity, building and maintaining a qualified plan is well worth the effort. A well-run plan with a company match can become a tool to attract and retain talented individuals and grow your business (along with your retirement savings) over time. Incorporating an experienced registered investment adviser into your plan can improve not only the quality of investment options for your participants but also their quality of life.
If you have additional questions, or would like to schedule a complimentary analysis of your plan with an investment professional, please contact us at your convenience. We know this is a big decision, so we look forward to having the chance to talk to you about all of your options. You can call Adviser Investments at (800) 492-6868 or email us at email@example.com.
This material is distributed for informational purposes only; and is not financial or investment advice. Speak to your financial adviser before taking specific action. The investment ideas and opinions contained herein should not be viewed as recommendations or personal investment advice or considered an offer to buy or sell specific securities. Data and statistics contained in this report are obtained from what we believe to be reliable sources; however, their accuracy, completeness or reliability cannot be guaranteed.
Our statements and opinions are subject to change without notice and should be considered only as part of a diversified portfolio. You may request a free copy of the firm’s Form ADV Part 2, which describes, among other items, risk factors, strategies, affiliations, services offered and fees charged.
All investments carry risk of loss and there is no guarantee that investment objectives will be achieved. Past performance is not an indication of future returns. Tax, legal and insurance information contained herein is general in nature, is provided for informational purposes only, and should not be construed as legal or tax advice, or as advice on whether to buy or surrender any insurance products. Personalized tax advice and tax return preparation is available through a separate, written engagement agreement with Adviser Investments Tax Solutions. We do not provide legal advice, nor sell insurance products. Always consult a licensed attorney, tax professional, or licensed insurance professional regarding your specific legal or tax situation, or insurance needs.
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