Individuals who weathered the economic storm with their 401k plans have recovered most of their value, Alabama experts say, while new regulations that will allow business owners to share their fiduciary responsibility with those who advise them should make the retirement plans even more attractive.
Such plans began to be offered in the late 1970s as an alternative to traditional pension plans. In most cases, employee contributors—“participants” in 401k plan language—make a pre-tax contribution deducted from their paycheck and invested in their choice of several funds selected by the plan sponsor, usually the owner of the business where they work. In many cases, employers match all or part of the employee’s contribution. Sponsors select the plan funds with the help of advisors, usually a professional financial manager. Sponsors have shouldered the fiduciary responsibility for their firms’ 401k plans, as they did for seeing that pension plans were properly funded.
As retirement options go, the 401k is “the greatest thing since sliced bread, ” says Dan Rollo, of Mobile’s PlanFocus, because it’s payroll-based, pre-tax, has high limits, and because contributions are generally matched by the employer.
When the recession hit in 2008, some 90 percent of participants kept their money in their 401k plans and kept their allocations in tact, says Phil Anderson, a consultant and head of the 401k division at Welch Hornsby & Welch Inc., in Montgomery, which serves as consultant to several plans totaling some $1.2 billion in assets. “If you consider the rebound and contributions, most participants are ahead.”
“If I had $100, 000 and it dropped to $65, 000, a lot of people sold out and locked in their loss, ” says Carl Dekle, of PlanFocus in Mobile. “But if I stayed in, I’d be back to $108, 000.”
Beau Williams, director of plan research at Welch Hornsby, adds, “The biggest hit would be that a lot of companies suspended their matching or discontinued it. That obviously impacts the employees’ portfolios.”
Now employees who may have frozen their savings are setting aside funds again, Williams says, and their employers who froze or suspended their contributions are once again offering that benefit to employees.
Dekle says 70 percent of employers are reinstituting their match–40 percent have reinstated it already and another 30 percent are in process.
“If you have a big match, it’s an instant return on investment, ” says PlanFocus’ Rollo.
When the recession hit, “People lost as much as 50 percent of the net worth of their funds, ” says Richard Davis, director of retirement services for ProEquities in Birmingham.
Usually 401k funds aren’t available until the participant turns 59-and-a-half, with exceptions for specific hardship scenarios—loss of job, funeral expenses, preventing foreclosure and the like. If money is withdrawn under other circumstances, the participant is liable for taxes and for significant penalties—sometimes as much as 30 percent.
There was an increase in these hardship withdrawals, says Steven Causey, vice president for Warren, Averett, Kimbrough & Marino Wealth Management, LLC, part of the state’s largest CPA firm based in Birmingham. The firm offers turnkey 401k plans, handling every aspect—creating the funds line up, monitoring and changing plans, and developing models ranging from aggressive to ultraconservative. The wealth management group handles nearly $500 million, about half in retirement plans, Causey says.
Keeping track is important, but most people don’t bother, says Beau Willliams, of Welch Hornsby. “Inertia is pretty strong.” He expects that a new trend toward more education will help participants recognize that investment strategies need to be more aggressive for younger workers and more conservative for older workers and need to be reviewed periodically.
While every participant needs to keep track of his or her investment choices, tailoring them to changing age and life conditions, all those changes should be part of a long-term plan, rather than a market reaction, says Causey, of Warren, Averett.
“People who stuck with their investment philosophy are feeling much better today, ” Causey says. “People who moved out of the market, who are still in cash looking for the time to get back in—they’ve lost that opportunity for the market rebound.”
It helps to remember that what one person sells in a panic another buys at a sale price, Dekle says.
And if you took your money out, says ProEquities’ Davis, “the only way to get it back is to reinvest, ” though if you’re close to retirement, you may want to look at annuities and other options.
The hot topic surrounding 401k plans today is a set of new regulations, slated to take effect in July, that are “fundamentally changing and reshaping who’s going to be in the business, ” Davis says.
Everyone agrees the new regulations should be an improvement for plan participants.
However, with new scrutiny covering fees, handling of funds, fiduciary responsibility and more, it’s possible the new regulations will be discouraging in the short term, Davis says. Sponsors may be reluctant to offer 401k plans, and advisors may be reluctant to share the responsibility with their clients.
If a plan fails, the sponsor’s CFO carries the fiduciary liability, says Dekle, of Plan Focus. It’s one of the few fiduciary responsibilities than can pierce a corporate shield, he says. Good advisors now prepare a fiduciary audit file so the employer can explain how investments were chosen and monitored, how much they cost participants and more—just in case the sponsor gets a call from the Department of Labor. Last year alone, the DOL levied $2.1 billion in fines.
All the plan advisors know of companies that dabble in 401k plans, rather than devoting their full attention to them. Those companies are likely to be edged out of the marketplace. “The market will drive it, ” says Causey, of Warren, Averett. “Companies will ask more of their advisors so that advisors who have trouble meeting those new responsibilities will have a smaller and smaller market share.”
While the 401k horizon looks pretty rosy today, those involved at every level are still jittery, says Dekle, of PlanFocus.
Participants are worried about the level of government spending, about volatility in the marketplace and about whether they’ll still have a job next week, Dekle says. Plan sponsors, meanwhile, are worried about their fiduciary liability, about new regulations and about the economy as a whole. And advisors share the worries about new regulations, though they’ll probably work in favor of well-qualified advisors, he says. “If I’m able to document my work, I don’t mind showing my fees.”
But overall, 401ks remain a great retirement planning tool, says Causey, of Warren, Averett. “If your company is doing a dollar-for-dollar match, the market would have to drop 50 percent before you get to the money you invested. Yes, you lose some of the money from company contributions, but you wouldn’t have had that money anyway if you weren’t contributing. That’s a nice cushion to cover losses.”
Nedra Bloom is a freelance contributor to Business Alabama. She lives in Mobile.
By Nedra Bloom