The Frugal Fiduciary Small Business 401(k) Blog
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I welcome this “Retirement Insights” piece from J. P. Morgan Asset Management – as far as it goes. The piece makes several excellent points that can benefit all plan sponsors, but presents a view biased toward active management. No surprise. JP Morgan actively manages retirement plan investments – they have a point of view that ultimately promotes the company’s business and brand.
Any 401k plan sponsor in America – repeat ANY – can buy market returns dirt cheap. There are no economies of scale in the market for indexed investments. No minimum purchase requirements. No high pressure sales pitches. Buy an index mutual fund or ETF and you’ve locked in market returns. As I have written previously, this indexed approach is the new baseline for small business 401k plans.
MEPs have been floated as a way for small employers to somehow pool resources and negotiate better 401k deals that are supposedly available only to large employers. A great deal of lobbying money and Congressional attention has been invested in expanding MEP availability. Incoming Senate Finance Committee Chairman Hatch has authored a bill that makes the expansion of MEPs a key part of 401k reform legislation. The “open” MEP concept has also been included in other proposed legislation. Expect it to be reintroduced in 2015.
The Roth 401k concept is outstanding – it provides an excellent way to build long-term wealth and may provide outstanding tax benefits for those positioned to make the most of its advantages. The problem is that very few plan participants use it, let alone understand it.
Forty years after the passage of the Employee Retirement Income Security Act - ERISA – it seems like we are far removed from the issues it attempted to address. In 1974 40% of private sector employees were covered by employer-sponsored defined benefit (“DB”) pension plans. These DB plans provided workers with a lifetime income annuity upon retirement. These plans provided a high level of income security – if the employer met funding requirements. However, many of these plans were only partially funded and plan failures were not uncommon. ERISA required tighter funding requirements for these plans, thus improving workers’ income security. A more fully funded plan was more likely to meet future obligations.
MassMutual’s actions in the lawsuit Golden Star, Inc. v. MassMutual Life Insurance Company were never in dispute. The financial giant oversaw variable annuity investments in the plaintiff’s plan and received both direct compensation from plan participants and indirect compensation – in the form of revenue sharing – from other mutual fund companies. MassMutual claimed that revenue sharing offset fees and payments it would have otherwise collected from the plan. Golden Star claimed there was no dollar-for-dollar offset, which effectively allowed MassMutual to set its own compensation.