Plan sponsors and participants want to invest with confidence. Being able to choose from a variety of investment options is important. However, the vast majority of 401(k) plans in the market place today offer mutual funds as their primary if not only investment vehicle. This predominant offering presents a series of potential problems with regard to diversification, transparency, and style drift. To address these shortcomings we use other investment vehicles:
Separately Managed Accounts: SMAs provide the benefits of mutual funds but with some additional advantages. Both mutual funds and separately managed accounts provide diversification and professional management, but SMAs also offer individualized customization and increased transparency.
Individual customization allows our 401(k) clients the ability to exclude specific sectors, or industries from their 401(k) portfolios. This helps them balance philosophical and investment priorities. The transparency of SMAs allows our clients to know exactly what they own. In addition, we provide on-going due diligence over the money managers to ensure style purity in each asset class is maintained. This helps protect the integrity of the 401(k) participant’s portfolio.
Exchange Traded Funds: An ETF is an investment vehicle that allows investors to directly invest into an index, at a much lower cost than traditional mutual funds. Since 1993, the ETF industry has positioned itself as an alternative to active fund managers and addressed the limitations of index mutual funds. Mutual funds are traded at net asset value (NAV) after the market closes and only have to report holdings quarterly. In contrast, ETFs trade during market hours just like a stock and holdings are reported virtually in real time.
Our 401(k) clients take advantage of these benefits by accessing esoteric asset classes ranging from debt to equities to alternatives as well as developed and emerging market economies. By adding these asset classes, we have the ability to increase our 401(k) clients’ expected risk-adjusted returns. This is designed to provide a smoother sequence of returns enabling our clients to better enjoy their investment experience.
For plan sponsors the duty to act prudently is one of the fiduciary’s central responsibilities under ERISA. It requires expertise in a variety of areas, such as investments. Lacking this expertise, a fiduciary will want to hire someone with that professional knowledge to carry out the investment and other functions of the plan. Prudence focuses on the process for making fiduciary decisions. For sponsors who participate in the Iron Logic 401(k) Advisory process and decide to implement our recommendations we offer ways to satisfy or eliminate fiduciary responsibility. Two significant areas we address are as follows:
Control Legal Liability (sole interest of plan participants): Litigation is an expensive, unproductive and stressful waste of a plan sponsor’s time. Our solution is designed to protect sponsors from the legal liability associated with sponsoring a retirement plan by providing employees with an individual investment policy statement appropriate for their situations and objectives. Because employees sign off on their investment policy statements, which contain their recommended asset allocation, sponsors are relieved from the liability associated with selecting the employees’ investments for them. The employees, thus, share in the responsibility for their own investments. Our 401(k) platform provider accepts the fiduciary responsibility associated with recommending the asset allocation. In addition, all employees will have access to an Iron Logic advisor who will provide independent advice as needed. The Iron Logic advisor will also take fiduciary responsibility for his/her advice. Iron Logic 401(k) Advisory has made every effort to provide employees with appropriate investments. As a result, the plan sponsor receives the piece of mind necessary to focus on his/her own business.
Diversifying Plan Investments: Employees will receive a customized asset allocation based on their individual objectives and risk tolerance. Each asset allocation will include up to 21 different asset classes and include esoteric asset classes ranging from debt to equities to alternatives as well as developed and emerging market economies. Online account access and quarterly performance reporting will allow employees to discern whether their investments are on track and make changes to their allocation if needed with the help of an Iron Logic advisor.
As mentioned in an earlier section, participants, the very people for whom 401(k) plans were designed, are the problem. Specifically, the way they manage their investments is the problem. They lack the training, time, and interest to manage a portfolio. Education, therefore, is paramount. However, education is only successful if participants understand its value-and use it. Iron Logic 401(k) Advisory utilizes a process where education is provided, value is identified, and investment recommendations from professionals are implemented. This is designed to better control investment behavior and increase a participant’s chance of success. We believe that emotions can be controlled with discipline and knowledge and keeping losses contained is the best way to achieve long-term financial success.
We address the need for participant education in two unique ways:
Investment Proposal: Every participant receives a comprehensive Investment Proposal. This explains how an Iron Logic advisor and our 401(k) plan service provider will work together to help the participant meet their investment goals. The information a participant provides is used to tailor a customized portfolio based on their needs and circumstances. The portfolio design requires the most advanced financial and economic research. This knowledge is continuously updated and shapes the monitoring, rebalancing, and updating of the participant’s portfolio. The 401(k) service provider works with an Iron Logic advisor and the participant to make certain the investments match the participant’s objectives. The proposal includes sections on portfolio management philosophy, personal information and needs diagnostics, investment analyses, and a section designated to identify the value being created.
Investment Policy Statement: Every participant utilizing the Iron Logic 401(k) Advisory process must first complete an investor profile and risk tolerance questionnaire. From this information an Investment Policy Statement (IPS) is generated. The investment policy statement serves to clarify the objectives of the investment program amongst the team members, meaning the participant, the Iron Logic advisor, and the 401(k) plan service provider. This document will remind everyone why a particular plan is being followed and will assist in staying the course when there is a temptation by the participant to veer away from the plan. This reminder is especially critical when markets are at their extreme: booming or crashing. Most successful investors are successful because the take a long-term perspective and are patient with a prudent approach to the markets, such as the uniquely disciplined management strategies employed by our 401(k) plan service provider. Whenever the participant’s personal situation changes or market changes warrant, the portfolio will be revised with the help of an Iron Logic advisor to meet the participant’s needs. If changes are warranted, a new IPS will be generated so the team stays focused on the participant’s objectives.
Many plan sponsors have difficulty determining the fees they are paying for their retirement plan. They need competitive fees that are fairly disclosed. As a fiduciary to the retirement plan, a plan sponsor is required under the Department of Labor guidelines to pay only “reasonable” plan expenses. While the law does not specify a permissible level of fees, it does require that fees charged to a plan be “reasonable”. After careful evaluation during the initial selection, the plan’s fees and expenses should be monitored to determine whether they continue to be reasonable. Plans with mutual funds as the primary investment vehicle offer a unique challenge to a plan fiduciary when they attempt to determine the total cost of ownership of a fund. The expense ratio of a fund, the standard measure of how costly a fund is to own, simply does not tell the full story. Hidden costs associated with trading and transaction costs have to be considered. There are two ways we address this issue for our plan sponsors and participants:
Fee Comparison Analysis: Each comprehensive retirement plan analysis includes a complimentary Fee Comparison Analysis. This analysis takes a look at the current plan expenses and compares them to the Iron Logic proposed plan. The analysis looks at design and installation costs, annual administration costs, investment costs (in total), platform fees, and asset fees. This analysis provides the plan sponsor the information required to fulfill their fiduciary responsibilities. Sponsors will be able to determine what is “reasonable” based on this information. At a minimum, the sponsor will be able to satisfy their duty to review the plan. At best, a sponsor will realize the fees they once thought reasonable, have become unreasonable, and they will make improvements.
Transparency: Iron Logic Wealth Advisory, as a Registered Investment Advisor, is dedicated to transparency. As a fee-only firm we do not accept revenue-sharing of any kind. We are compensated only by our clients. With our 40l (k) offering, the sponsor and participant will never have a doubt about the fees and expenses associated with the plan. A clear accounting of all fees and expenses for each participant's account is sent to each participant in a monthly billing statement. Plan sponsors, therefore, can be confident they are fulfilling their fiduciary responsibility to plan participants.
Each plan sponsor has specific design needs for their retirement plans. They want a solution that is flexible while still being compliant with the law. Iron Logic 401(k) Advisory has partnered with leading plan design and administration firms to deliver compliant solutions reflecting the latest trends in the industry. They are technically competent and specialize in utilizing the law for the sponsor and participant’s benefit. A deeper Retirement Plan Analysis that includes potential plan design improvements is available upon request.