401(k) REVIEW CASE STUDIES
 

CASE STUDY A - One recent 401(k) Review not only identified several areas for significant improvement to a $14 million plan but also revealed fees of over $700,000 being charged to unknowing plan sponsor and plan participants.

In this same case, more than half of the participants opted to add personal advice at an additional cost of 1.5% to the fees already being charged.  The 401(k) Review was essential information for this plan sponsor and will become welcome relief for their participants.

CASE STUDY B - Freedom One was asked to conduct a 401(k) Review for a contracting company who received a visit from the Department of Labor (DOL).  It is believed the surprise visit, which resulted in a DOL fiduciary audit, due to a disgruntled subcontractor who failed to receive work from the contracting company.  The investigation is currently underway and the DOL's fines and penalties have not been determined.

CASE STUDY C - A Michigan auto dealer has had an interest in updating his 401(k) plan for several months.  After a conversation with his broker, he was informed that his plan was subject to an early termination penalty or "surrender charge" if he left before the ten-year period specified in agreement.  Dealer was also told he would have to postpone any changes to his plan for six months, and at that time, the broker would switch his 401(k) plan to another insurance-based product.

Dealer contacted Freedom One Retirement Services and requested a 401(k) Review.  Findings from the 401(k) Review proved the dealer was paying excessive fees and the funds in his plan were considerably underperforming their peer group averages.  After review of the original contract, we contracted the 401(k) plan company, on behalf of the dealer, and discovered the surrender charge clause had lapsed four years earlier.  Dealer has since converted his plan to the Freedom 401(k).

CASE STUDY D - A Sandusky business owner experienced several “aha moments” during a 401(k) Review.  The owner quickly learned of his responsibility to select, monitor, and manage his plan's investment options with his current service provider.  As there was not a process in place there had never been a formal review done of his investment options.

As a result he was surprised to learn that 8 of the plan's 23 investment styles, representing nearly 40% of the plan's assets, were underperforming the appropriate benchmarks over a five-year period.  Additionally, new funds had been added over the last few years and underperformers were not removed, resulting in several investment classes containing multiple managers.  He learned of a unique investment advisor, willing to contractually accept the transfer of the investment portion of his fiduciary responsibility and associated liability, who could employ a process that would keep him in compliance with ERISA regulations.

CASE STUDY E - We recently conducted a 401(k) Review for a  prospective client in Sandusky, Michigan and discovered their plan to be extremely limited in their investment line-up.  The lack of investment options limits the participants' ability to diversify and reduce risk. 

Placing all assets in a single family of funds adds an unnecessary element of risk to your retirement plan. While that company may have some exceptional funds, their success is generally limited to specific investment style.  They usually lack exposure or experience in other styles. This direction would be like “placing all your eggs in one basket” and certainly not a decision that meets the fiduciary responsibility of diversifying the investment options to minimize risk of substantial losses.

CASE STUDY F - Beware of insurance companies' fixed accounts.   Many fixed accounts have a market value adjustment (MVA) element. MVAs can be positive, if prevailing interest rates are lower than the prevailing rate, or negative, if prevailing interest rates are higher. 

One contract we recently reviewed used a formula to calculate the surrender charge and did not offer the ability for a positive MVA. 

In this example, the insurance company set the interest rate and not the market forces. This leads to problems as this company solely determines the MVA on the plan's assets. Some considerations that determine the credited rate include expense and mortality risks, interest rate guarantees, investment income and capital gains.  There is no transparency to these costs. Since this is a pooled account of the insurer, other 401(k) plans’ cash flows can impact returns. 

EXPERT ARTICLE:
So, what are MVAs? Why is it important to understand them, and how do they affect the surrender value?  MVA's...the hidden "Catch"