About Letort Trust

LeTort Trust is an Independent Trust Company with a single focus of providing personalized financial solutions to individuals, businesses and institutions. As an Independent Trust Company, we are held to the highest standards of fiduciary accountability in the industry. Our clients depend on the prudence and expert guidance we provide through our customized wealth management and retirement plan services.

 

The Future of Managed Portfolios in 401(k) Plans

Early on, companies built a nest egg for their employees’ retirement by putting money into a pension fund managed by an investment professional with safety and a focus on the long-term as their top concern. Then, in the early 1980s, Ted Benna introduced the concept of the 401(k) plan, earning him the title of “Father” of 401(k). The article “An Interview with Ted Benna” shares his thoughts as he discusses the benefits and drawbacks of the product over time. As the era of the 401(k) continued, the idea of do-it-yourself investments attracted many and led employers to believe it a way to reduce their fiduciary liability. Companies offered a variety of investment choices and employees were left to select and manage their own investment options.

By 2006, however, the tide began to turn as more and more research confirmed that providing too many investment choices was becoming a problem. Employees were not saving enough and making the wrong investment decisions. As employee complaints mounted, Plan Sponsors were looking down the barrel of a fiduciary shotgun. This was particularly true as employees saw their retirement balances drop during the market downturn of 2008.

The Department of Labor (DOL) stepped in with regulations that introduced qualified default investment options. This provided employers with a suitable choice to direct participant assets when they were implementing automatic enrollment. Three of these investment options were deemed suitable for default investments within a 401(k) plan: Managed Asset Allocation Models, Balanced Funds and Target Date Funds.

The identification of approved default investments was in response to DOL concerns about inadequate investment knowledge levels of plan participants. Many participants of 401(k) plans did not have the time, expertise, or interest to actively manage their 401(k) investments. Managed Asset Allocation Models provided both the proper diversification and professional oversight necessary to help plan participants manage their retirement investments for the long-term.

And so the trend continued toward restructuring 401(k) plans to help employees overcome the confusion that resulted in reduced participation levels and retirement account balances.

In a recent article entitled, “How Plan Sponsors Can Restructure a 401(k) Investment Menu to Increase Participation,” Christopher Carosa, CFA, encourages Plan Sponsors to move from a large menu of investment choices to a smaller choice of well diversified options within their 401(k) plans.

Christopher states, “When industry researcher Sheena Iyengar and her team measured the impact of choice overload in 401(k) plans, they found participation dropped by nearly 5% when comparing plans with 5 funds versus plans with 15 funds. The participation rate continues to drop steadily when a plan has more than 30 funds. Beyond that, the participation rate drops approximately 4% for every 5 funds added to the menu. For 401(k) plan sponsors looking to increase participation – or to avoid failing the annual nondiscrimination test – the consequences of choice overload can be devastating.”

Within the article, Christopher offers insights into how Plan Sponsors can ease the burden of participant choices through a three-part series of steps on evaluating and simplifying plan options.

In, “How America Saves 2013”, an industry study by Vanguard, statistics are showing that more 401(k) participants are selecting professionally managed portfolios than ever before. This trend shows a shift from plan participants managing their own investments to selecting portfolios that are managed by investment professionals.

The Vanguard report states, “We predict that based on the recent shifts toward managed portfolios; 55% of plan participants and 80% of new 401(k) participants will be invested in a managed portfolio option by 2017.” Managed Portfolios also provide another benefit: rebalancing a participant’s asset allocation to stay in line with their long-term tolerance for risk. FINRA, the largest independent securities regulator in the industry, outlines the importance of rebalancing in “Smart 401(k) Investing.”

It’s important to remember that all managed options are not the same and keeping costs down plays a critical role in the long-term investing success of plan participants. In his Investor Place article entitled, " 5 Managed Portfolio Criteria for 401(k) Investors." Scott Holsopple of Smart 401(k) offers insights on what to look for when considering managed options. Scott identifies the additional costs inherent in managed options, but urges diligence and scrutiny to avoid products with excessive fees.

Looking forward, employers will need to be vigilant in ensuring they offer investment choices that are well managed, cost efficient, and appropriate for their employees. Due diligence will continue to play an important role as employers seek to fulfill their fiduciary duties. And if the current trend prevails, “Less is more” will continue to be the mantra that Plan Sponsors live by in building a prudent 401(k) plan for their employees.