Managing Your Money

Part 2: Auto-pilot is for airplanes, not 401ks


(In this week’s installment, better options for your company and your employees, as well as some questions each business owner should ask him or herself so that everyone benefits.)

Trustee-directed plans can be a MUCH better option for your company and your employees. These 401k plans remove the investment responsibility from the employee and places it in the hands of a qualified investment advisor or firm that manages the investments on behalf of the participant. The plan is managed pursuant to an Investment Policy Statement that clearly outlines all the important facets of how the plan will be managed, what your process is for selecting the advisor, etc.

Investments in a trustee-directed plan can be built with individual securities, where a qualified advisor can most properly manage the investments within the plan. And I don’t think it is a secret that properly diversified and consistently managed accounts have the potential to provide better long-term returns which can lead to much better retirements for employees.

So why don’t more businesses offer trustee-directed plans?

Because they’re afraid of getting their butts hauled into court by disgruntled employees who complain that the company mismanaged their retirement accounts. But this is a misnomer bordering on myth.

In reality, by utilizing a trustee-directed plan and implementing a clear and effective process for selection and monitoring of a qualified investment advisor, a company can help manage their potential liability. Your lawyer should know this.

As a financial advisor who specializes in portfolio management, I’m obviously biased toward the trustee-directed plans. But I’m also a student of facts. Researchers at the Center for Retirement Research at Boston College studied investment data from 1988-2004 – an era where stocks produced an average annualized total return of 11.5 percent. They found that employer pension funds – the pooled, trustee-directed plans – outperformed the self-directed 401k plans by an average of about one percentage point per year. Pretty remarkable considering that the trustee-directed plans held a lower portion of stocks during that bull market, yet still outperformed the participant-directed plans.

Just in case you were interested in doing the math on that scenario: the difference an extra 1% annual return would have made over the 17-year period from 1988 to 2004, on a $1 million dollar initial investment, could have been as much as $781,000. Wow.

So, business owner, ask yourself these questions, and be honest:

1. When was the last time you provided education and resources for your employees to make sound investment decisions with their 401(k) plan?

2. When was the last time you reviewed the investments in the plan to determine their appropriateness?

3. How expensive to the participant is the plan you provide?

4. Is the advisor to your plan REALLY a qualified investment professional? What process did you go through to determine that?

5. Can you clearly articulate their investment process?

6) Can THEY clearly articulate their investment process? (I’m not kidding)

Do your employees a solid favor and get your retirement plans off auto-pilot. Give them an opportunity to have a qualified investment advisor make the investment decisions and consider moving to a trustee-directed plan. It might take a little time and effort, but you and your employees should benefit.

Financial Planning Association of Massachusetts member Benjamin Beck is Managing Partner and Chief Investment Officer of Beck Bode Wealth Management of Dedham, Massachusetts. He can be contacted at or 617.209.2224.

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