Institutional Services - Frequently Asked Questions

401ks - Expense Related

1. How much do 401k plans cost?
2. Who pays plan expenses?
3. What is a “bundled” 401k?
4. What should a fiduciary know about a “bundled” plan?
5. Describe a mutual fund expense ratio.
6. What are “soft dollar” transaction costs?
7. What is revenue sharing?
8. What is meant by “hidden” fees?
9. What is the most ethical approach regarding fees?

401ks - Fiduciary Related

1. As a plan sponsor, what are the potential risks related to a 401k plan?
2. What is a fiduciary?
3. What qualifies one as a fiduciary?
4. What is fiduciary drift?
5. Does ERISA recognize any exceptions to liability for employees who “drift” into a fiduciary role?
6. How can employers manage the risk associated with fiduciary responsibilities?
7. What is an independent fiduciary?
8. What is an investment fiduciary?
9. What is an administrative fiduciary?
10. Do professional fiduciaries carry insurance to protect my plan’s assets?
11. How will fiduciaries be affected by use of a large, brand-name provider?
12. What are the ramifications of having a 401k that is part of a financial services agreement with a financial services institution? For example, my bank receives commissions for selling insurance products sold by its 401k provider, or my company’s attractive credit rate with a bank is tied to keeping its 401k with the bank.

G Fiduciary Retirement Income Security Plan

1. What is the G Fiduciary Retirement Income Security Plan?
2. What is the main objective of the G Fiduciary Plan?
3. How does the G Fiduciary Plan achieve these results?
4. How is the G Fiduciary Plan different from traditional 401(k) programs?
5. What waste and problems does the G Plan eliminate?
6. How does the G Plan eliminate the need to work with sales people?
7. How much waste is built in to conventional 401(k) plans?
8. How can the G Plan eliminate enrollment meetings?
9. Is automatic enrollment common?
10. What if a serious fiduciary breach occurs? Who is liable?
11. Do we have to convert our existing plan into the G Plan right now?
12. How is the G Plan’s structure unique?
13. How complicated is it to adopt the G Fiduciary Plan?
14. Do we need to have a meeting to explain it to our employees?
15. How do employees feel about the G Plan’s simplicity?
16. Shouldn’t younger employees have different portfolios than older ones?
17. If permitting non-fiduciaries (participants) to control trust assets is not consistent with prudent and correct fiduciary principles, why do so many plans permit it?
18. Shouldn’t a higher priority be set on higher investment returns?
19. Are higher investment returns than the G Plan expects even possible?
20. What is the past performance of G Fiduciary’s investment portfolio?
21. How is payroll/contribution data processed and transmitted?
22. Where are contributions sent?
23. Who handles the nitty-gritty details of the G Plan?
24. Will I be able to see my company’s Plan information online?
25. Can participants see their account balances online?
26. What happens when a participant terminates employment?
27. What if employees have questions?

HR Investment Consultants publishes 401k Averages Book. The average annual cost ranges from about $800 for a plan with 25 participants and $1,250,000 in assets to an average annual cost of $530 for the largest corporate plans. In large part the disparity reflects the economies of scale that accrue to cost-conscious larger plan sponsors. (return to top)

Standard practice places the financial burden on employees. All fees will be passed along to the participants, often through “bundled” plans, expense ratios and revenue sharing. “Hidden” fees often prevent calculation of the total cost. (return to top)

“Bundled” refers to one provider managing the entire plan and its disparate tasks, such as investments and administration. The provider may delegate these tasks to subsidiaries or entities in its network. Nevertheless, the employer deals with the provider exclusively. (return to top)

“Bundled” plans resist economic scrutiny. Often times, these service providers become so intertwined that the provider can only estimate a provider is compensated from a 401k plan. A fiduciary must demand a more rigorous plan accounting. (return to top)

The expense ratio includes the investment management fee and the 12b-1 fee. The investment management fee is more easily grasped than the 12b-1 fee. This latter fee was designed to provide mutual funds with cash for advertising purposes. Once a mutual fund is no longer reliant on advertising for its viability, the 12b-1 should be eliminated. However, academics point out that the 12b-1 fee has not gone away regardless of total assets. It now extracts revenue from investors for a variety of purposes having nothing to do with advertising, including paying for plan costs.

The expense ratio excludes transaction costs. Transaction costs occur when a brokerage firm buys and sells securities for a mutual fund portfolio. The most patent fee is the brokerage commission; however, trading also costs investors in more obscure ways. For instance, buying or selling a security affects the market price of a security. If transaction costs were included, the stated expense ratio would likely double!

Investors must beware that these costs have an adverse effect on long-term performance. They also should know that a form of transaction costs called “soft dollars” may be used to pay for questionable services. (return to top)

Regarding “soft dollars,” an investment company intentionally overpays for brokerage services; in return for the extra compensation, the broker promises to provide research to the investment company. However, these “soft dollars” are often subject to abuse, since they are obscure and poorly regulated. Many investment companies, such as Vanguard, do not pay “soft dollar” commissions, while others, such as American Funds, still tout their benefit. (return to top)

Revenue sharing is the often undisclosed sharing of compensation among various service providers to a 401k plan. One source of harm from revenue sharing occurs when sponsors and participants believe they are paying top dollar for quality investment management in the hope of achieving superior investment returns. However, those high expense ratios and fees have no bearing on the quality of the investment management. Instead, the fees are a trough for the feeding of all service providers.

When revenue sharing is present, administrative charges are likely touted disingenuously as “free,” and sponsors cannot measure the quality of service against the fee paid for those services. Many revenue sharing arrangements are so convoluted and intertwined that the involved providers cannot determine how much their services cost a particular sponsor or participant. (return to top)

Hidden fees are usually related to business arrangements where one service provider to a 401k plan pays a third-party provider for services, such as record keeping, but does not disclose this compensation to the plan sponsor. 

Many fees are buried in obscure documents, such as fund prospectuses, statements of additional information (SAI), annual reports and enrollment guides. The arcane language used to describe these fees requires knowledge beyond the expertise of a CFO or HR Director. Therefore, practically speaking, these fees are “hidden” from all but a select group of industry experts.

A third form of “hidden” fee is that which never sees the light of day, such as transaction costs, discussed above. (return to top)

401k reformers want total transparency of fees because transparency motivates sponsors to seek more equitable compensation structures from their 401k providers. Reducing fees means participants keep more of their invested dollars and improve their retirement picture.

However, important centers of influence in the financial industry and their political surrogates resist progress; one reform-minded expert, Scott Simon, notes that the recent DOL fee disclosure regulation intended to help participants has been uncut by the opponent of reform. He titles the DOL regulation the “Anti-Participant Rule.” (return to top)

A sponsor who adopts a 401k plan has a fiduciary responsibility to participants and their beneficiaries. ERISA provides that plan fiduciaries have personal liability for misfeasance or malfeasance related to a plan. That personal liability will be shared by those who knew of the plan’s failing but took no corrective measures.

Fiduciary roles that are not clearly defined between the sponsor and other plan fiduciaries can lead to gaps in plan oversight.  (return to top)

Fiduciaries are invested with trust to handle affairs for a beneficiary, and they have a legal obligation never to violate that trust. It requires the highest standard of care on the fiduciary’s part and comportment to the highest ethical standards.

Congress chose to incorporate fiduciary principles into ERISA, which regulates 401k and profit-sharing plans. By contrast, ERISA does not regulate 403b plans; state fiduciary laws regulate these plans.

Under ERISA and related Labor regulations, the responsibilities of fiduciaries include: 

•  selecting and monitoring any service providers to the plan;

•  reporting plan information to the government and to participants;

• adhering to the plan documents, including any investment policy statement;

• identifying parties-in-interest to the plan and taking steps to monitor transactions;

• selecting and monitoring investment options the plan will offer and diversifying plan investments; and

• ensuring that the services provided to their plan are necessary and that the cost of those services is reasonable.

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A fiduciary has discretionary authority over plan assets. The HR director who hires one provider and not another has exercised discretionary authority. Non-fiduciaries, on the other hand, perform “ministerial” duties; these non-fiduciaries follow established regulations and have no authority to deviate from those guidelines. (return to top)

Fiduciary drift is the name given to the inattentive delegation of discretionary authority by fiduciaries. 401k plans require innumerable decisions and much attention, but often, there is no one at a firm with the necessary 401k expertise. Into this vacuum may step an HR director looking to prove his value or a controller whose accounting prowess presumably translates. The initial fiduciary is still “on the hook” for plan management except now others have authority to make decisions affecting their livelihood. (return to top)

No. ERISA does not differentiate between fiduciaries on the basis of how they acquired their discretionary authority. (return to top)

Fiduciaries can try to grasp the innumerable details of their 401k plan; DOL, attorneys, consultants and various websites offer advice and guidance.

Fiduciaries might also carry fiduciary liability insurance to protect them from the adverse effects of their own negligence or that of their co-fiduciaries. Generally speaking, employee benefit insurance excludes ERISA-related claims, and government-mandated fidelity/surety bonds covers only against intentional misappropriation of funds by those associated with the plan.

Close scrutiny of contracts with providers is a necessity.  For example, sponsors often assume they have delegated fiduciary investment advice for the selection and monitoring of investment funds to a service provider, but the service provider did not acknowledge that fiduciary role.

Another option is to hire an independent fiduciary, whose expertise is managing retirement plans with the utmost regard for plan participants. Plan costs are often significantly reduced, conflicts of interest do not influence investment options, and sponsors receive peace of mind being free from legal worries. Asset accumulation improves after rigorously reducing plan expenses. (return to top)

An independent fiduciary falls under ERISA § 3(38). He or she manages all aspects of the plan and assumes legal responsibility for the plan’s failures, if any. Independent fiduciaries relieve entrepreneurs and employers of the headaches associated with a qualified plan and free them to focus on their business. Sponsors enjoy tremendous time-saving benefits by hiring an independent fiduciary. (return to top)

An investment fiduciary falls under ERISA § 3(21). He or she has legal responsibility for investment management. Investment fiduciaries serve at the pleasure of the independent fiduciary or other plan fiduciary, who has the ultimate responsibility for all aspects of the plan.

Many sponsors delegate investment management for the purpose of shedding legal liability for asset management. However, sponsors must make sure that investment managers contractually bind themselves to serve as an investment fiduciary. Sponsors also must perform due diligence on the investment managers they hire. (return to top)

An administrative fiduciary falls under ERISA § 3(16). He or she has legal responsibility for plan administrative details and usually serves at the discretion of the independent fiduciary. (return to top)

You should be sure to ask. In particular, smaller firms may not carry insurance because of the cost. (return to top)

Brand-name should never be the deciding factor. Most brand-name providers will not assume responsibility as fiduciary of a plan; if the sponsor remains as the plan fiduciary, exposure to legal liability is unaffected by hiring a brand-name provider. Regardless of the provider’s market presence, periodic reviews are required to ensure the lowest cost and best service, since a current provider has little incentive to cut its profit margin. (return to top)

ERISA requires that a plan be operated exclusively for the benefit of the participants and beneficiaries. These arrangements are classic conflicts of interest and are termed prohibited transactions.  ERISA may require that this related revenue be paid to the retirement plan participants.  Obviously, avoid any such arrangement.  These prohibited transactions may also place plan fiduciaries at risk of violating their fiduciary duties, if the retirement plan provides less value than a comparable plan.  In the name of maintaining the status quo, a sponsor may be less than eager to negotiate lower 401k fees or cheaper investment options. (return to top)

The G Plan is a multiple-employer defined contribution plan governed by independent fiduciaries for the benefit of participants. It enables a dramatic improvement in how American workers prepare for retirement. (return to top)

The G Plan focuses on income replacement and security for participants and their beneficiaries, delivered in a crisp, clean, multiple-employer structure. (return to top)

By placing decision making processes in the hands of professional independent fiduciaries. By so doing, fees are both known and significantly lower than other plans, market-tracking returns are consistently obtained, benefit adequacy can be measured, and Directors, Officers and executives of employers are insulated from fiduciary risk and liability. (return to top)

The G Plan reduces waste and excessive fees through an intelligent, disciplined, low-cost approach toward managing costs and investing plan assets. (return to top)

The need for interaction with investment or insurance sales people, disruptive enrollment and investment education meetings, burdensome paperwork, fiduciary fatigue™ and worry, “pitches” about new and improved products, hidden fees, excessive fees, chronic mistakes, benefit adequacy uncertainty, fiduciary drift™, fiduciary transfer™, and internal investment return discrimination. Participants keep the savings for their future retirement benefits. (return to top)

The G Fiduciary Plan is not a product created and marketed by the investment industry. It was designed by leading expert independent fiduciaries. Its focus is not on selling “hot funds” or the newest 401(k) fads. Rather, its focus is creating retirement security for American workers through an entirely new, low-cost delivery process. There simply is no need for conventional investment advisors or sales people. (return to top)

The architect of the G Plan, Matthew D. Hutcheson, was tapped by Congress in early 2007 to testify as an expert witness on the topic of “Are Hidden 401(k) Fees Undermining Retirement Security?” His testimony, based on more than ten-years’ experience analyzing hundreds of 401(k) plans, shows that most plans are burdened with at least 1% to 2% of total plan assets each year. Over the course of a career, those excess, often undisclosed fees can drain between 16% and 31% of total retirement savings. And each year, such fees represent an unnecessary transfer of at least $25 billion from the hard-won savings of American workers. The G Fiduciary Plan eliminates this waste, and ensures that net investment returns track the broad market. Visit http://www.gfiduciary.com/page.php/6 for more information. (return to top)

Enrollment for the G Fiduciary Plan happens at the time of employment. Employees are automatically enrolled at 5% of compensation, and receive automatic one percent increases, year-after-year, until they reach IRS limits. An employee may affirmatively elect to defer more or less (including zero if that is what they want) by written notice to their Human Resource Department. Investment returns track those of broad market indexes for all participants equally; therefore, no investment education meetings are necessary. (return to top)

Yes; many plans already employ this strategy. Proposed legislation would make automatic enrollment (and other auto-features) the standard. (return to top)

The independent of fiduciaries are responsible and liable. However, the plan is structured in such a way that such a breach is extremely unlikely. (return to top)

Generally, yes. However, special consideration may be given under certain circumstances. For example, the G Fiduciary Plan could be adopted in parallel with an existing plan. Participants in the current plan could then choose to remain in the old plan or could transition to the G Plan at a later date. All new employees are automatically enrolled in the G Fiduciary Plan.

NOTE: In a “parallel” environment, the Fiduciaries of an existing plan would remain liable as fiduciaries for all participants and beneficiaries who stay in the old plan for three years after all assets have been transferred or distributed from it. Most employers see a practical reason to transition to the G Fiduciary Plan sooner than later. (return to top)

The G Fiduciary Plan is a multiple-employer plan managed by true Independent Fiduciaries. Special fiduciary governance techniques differentiate the G Plan from conventional pensions. Among those are, F-Iso™, F-Stip™, a single 5500 for all adopting employers, and a single CPA audit handled by the independent fiduciaries. In the G Plan, Directors, Officers and executives avoid day-to-day fiduciary responsibility, participants can better plan current savings rates, investment decisions are dictated by state-of-the-art strategies and tactics, investment portfolio decisions and attendant liabilities are no longer the responsibility of the employer and/or participants. Further, the streamlined, automated administration of the G Plan sets it apart from other 401(k)’s plans; and the list goes on. (return to top)

The G Plan can be implemented in an afternoon, with several follow-up weeks of training, guidance, etc. (return to top)

No, a meeting is not necessary. Our simple communication package, made available electronically in PDF format, will suffice. (return to top)

Nearly all appreciate and understand how it will produce favorable results for them personally. In conventional 401(k) plans, many employees are troubled and frustrated that they have been forced to select their own investments. They intuitively know they are making mistakes that will cost them dearly in the long-run. G Plan participants do not experience these frustrations. However, a few employees (usually 5% or fewer) think the G Fiduciary approach is too different from what they have grown accustomed to, and therefore subtly resist it. Those who do not want to join the G Fiduciary Plan may remain in an existing plan if it continues to run in parallel. However, once employees understand that the G Fiduciary Plan uses Nobel Prize-winning investment portfolio strategies, and employs the prudent fiduciary practices defined by ERISA, they generally come to understand the benefits of its streamlined approach. (return to top)

(16) Shouldn’t younger employees have different portfolios than older ones?

A common non-fiduciary practice is to encourage participants to choose investments based upon their “risk profile.” Conventional retirement plan wisdom says that younger employees can or should presumably take more risk than older employees. The flaw with this thinking is that personal risk tolerance is a fluid thing that changes daily. It is very expensive to monitor risk profiles regularly and nearly impossible to get a correct measurement on a participant-by-participant basis. By establishing a risk profile for the trust as a whole, all participants receive identical returns – i.e. returns that closely track the market as defined by the investment policy statement. This approach is both prudent and intelligent, and is consistent with true fiduciary principles for all participants. (return to top)

(17) If permitting non-fiduciaries (participants) to control trust assets is not consistent with prudent and correct fiduciary principles, why do so many plans permit it?

The retirement industry is widely controlled by the mutual fund and brokerage industries. These companies would normally be barred from the retirement plan industry because they are technically not fiduciaries. Due to an exemption received by the Department of Labor, they are permitted to not only participate in the 401(k) and retirement plan industry, but have eventually come to control it. This control has enabled them to introduce certain non-fiduciary practices that might be suitable for individual investors outside of a company-sponsored retirement plan, but are not appropriate for participants inside a plan. Those retirement industry practices that do not meet fiduciary standards should not be permitted. The G Fiduciary Plan embraces and endorses pure fiduciary practices. Nothing more, nothing less. (return to top)

(18) Shouldn’t a higher priority be set on higher investment returns?

Retirement plans governed by prudent independent fiduciaries place certain priorities on different elements of plan income. The “Hierarchy of Prudent Priorities™” consists of the following elements, in order of declining importance:

1. Correctly identified contribution rates on a participant-by-participant basis
2. Participant contributions generally
3. Strategically defined employer contributions
4. Employer contributions generally
5. Prudently modeled “appropriate” investment returns based on an acceptable level of risk and an acceptable time horizon. This does not mean the “highest” return possible during a short time frame, but rather returns that closely track the market on a consistent long-term basis
6. Interest from cash or cash equivalents

The highest priority is contributions that are carefully determined on a participant-by-participant basis to yield the best possible results and outcomes for that individual. The next priority is employee contributions of any kind. In other words, any contributions are better than none. After that, employer contributions, market returns, and interest from cash or cash equivalents. This hierarchy of priorities places the highest responsibility on the participants and what they choose to personally control. Variables they cannot control, such as the stock market for example, has a lower priority. Therefore, participants should spend most of their time managing the thing they can control, and less time on things they cannot control. The G Plan follows the “Hierarchy of Prudent Priorities™.” (return to top)

(19) Are higher investment returns than the G Plan expects even possible?

It is possible to earn higher returns during market upswings, but this might require taking additional risks that we do not view as prudent. The plan fiduciaries identify and accept a level of risk necessary to obtain expected investment returns over a long-term time horizon. We believe “market returns” based upon a simple portfolio of 60% equities (S&P 500 Stocks), and 40% fixed income securities (Bonds), will generate returns that, when coupled with appropriate contribution rates, will deliver favorable results to participants. Trying to get the “highest returns” or to “beat the market” costs money in the form of additional trading and fund management fees and possible additional risks, which almost always, over the long run, ends up hurting participants’ retirement income security. We believe a simple, disciplined approach is the most prudent strategy to build retirement income for participants. (return to top)

(20) What is the past performance of G Fiduciary’s investment portfolio?

Fiduciary rules governing 401(k) plans require that we disregard past market performance because past performance is not an indicator of future performance. Fiduciary prudence dictates that we develop a portfolio with a forward looking modeled return based upon sound economic and financial principles. Our portfolio, pursuant to our investment policy statement, targets a long-term modeled rate of return of 8% to 12%, at a known level of risk, with a time horizon of 5+ years. This is prudent, attainable, and consistent with ERISA and other fiduciary laws and guidelines. (return to top)

(21) How is payroll/contribution data processed and transmitted?

The G Fiduciary Plan employs an automated web-based system to streamline administration. The simple upload process uses standard export features common in virtually all payroll/accounting programs. G Fiduciary’s staff provides detailed training and instructions to your accounting staff. (return to top)

(22) Where are contributions sent?

All contributions are sent to the Plan custodian electronically through a standard procedure. Once contributions are received, the system is fully automated and involves ACH debits, transfers and automated investing. Even distributions (benefit payments) to former employees are handled at the custodial level through streamlined and automated processes so the risk of human error is minimized. When you upload a payroll, the system will confirm employee and employer contributions and authorize an electronic transfer to the Plan. (return to top)

(23) Who handles the nitty-gritty details of the G Plan?

G Fiduciary works with “best-of-class” independent record-keepers, fiduciaries, custodians, financial institutions, accountants, attorneys and others, who provide top-quality services to tens of thousands of participants in a highly-automated fashion. (return to top)

(24) Will I be able to see my company’s Plan information online?

Yes. A state-of-the-art web-based system provides access to your plan and its participants, including standard reports. (return to top)

(25) Can participants see their account balances online?

Yes. With a unique username and password, participants can view their account balances, which are updated daily. (return to top)

(26) What happens when a participant terminates employment?

You will give that participant a benefit request form (distribution form) on their last day of employment. They will fill the form out and send it directly to the address (fax) found on the forms. We will handle it from there. You are not required to be involved further. (return to top)

(27) What if employees have questions?

General questions about the plan, such as how to change 401(k) deferral rates/amounts, will be presented to your HR/benefit department as they normally would. Changes to beneficiary elections or general 401(k) questions are handled through our website. General questions about distributions of benefits are also answered online, at http://www.gfiduciary.com/. (return to top)