401k discussion with HR

[jackely]

PIMCO total return, isn't that Bill Gross's bond fund, the guy who is now infamous for dumping U.S. Treasuries at the beginning of the year (I think Clive said they were up 33%)? I think we have that in our 401k too.

I've never heard of a 401k offering ETF's but then again I've never heard of the SDBA either. I'm curious to see what response you get from HR.

The ideal 401k to me would be one that allowed in-service roll overs. I discovered only recently that mine allows it after age 59 1/2 and thus I wasted the last three years earning a total return of -6.6 percent (see above) before making a withdrawal. They won't allow a rollover of the Roth portion however, so I've put it all into an S&P index and made it an integral part of my stock allocation.

[Storm]

PIMCO total return, isn't that Bill Gross's bond fund, the guy who is now infamous for dumping U.S. Treasuries at the beginning of the year (I think Clive said they were up 33%)? I think we have that in our 401k too.

I've never heard of a 401k offering ETF's but then again I've never heard of the SDBA either. I'm curious to see what response you get from HR.

The ideal 401k to me would be one that allowed in-service roll overs. I discovered only recently that mine allows it after age 59 1/2 and thus I wasted the last three years earning a total return of -6.6 percent (see above) before making a withdrawal. They won't allow a rollover of the Roth portion however, so I've put it all into an S&P index and made it an integral part of my stock allocation.

The point is that a brokerage window 401k shouldn't have arbitrary restrictions placed on it.  My companies 401k is with Fidelity and their brokerage window option allows me to buy anything a Fidelity retail investor can buy - including Treasuries on the secondary market, stocks, ETFs, and even options if I really wanted to.

[MediumTex]

This morning I got a note from the high-level HR person saying that I would be contacted by our tax qualified plans manager for further discussion.

In case I am actually contacted, is there anything beyond what I've mentioned above that I need to say?  Anything useful to know beforehand?

I would just emphasize that you are interested in implementing a conservative investment strategy that does not involve active trading and that expanding the scope of the plan's brokerage window will allow you to do it.

If she asks what is wrong with the plan's basic investment lineup you might compare the returns of basically every fund in the plan in 2008 to the PP's 2008 returns.

I would just keep saying that participants usually use a brokerage window to take on more risk than the plan's basic lineup offers, but that ironically you want to use the brokerage  window to take on less risk.

[MediumTex]

The point is that a brokerage window 401k shouldn't have arbitrary restrictions placed on it.  My companies 401k is with Fidelity and their brokerage window option allows me to buy anything a Fidelity retail investor can buy - including Treasuries on the secondary market, stocks, ETFs, and even options if I really wanted to.

Agreed, and that's good to hear... my company's 401k is with Fidelity as well.  I thought that maybe it was Fidelity doing the restricting, but obviously that cannot be the case.  Out of curiosity, do you have a limit on the amount you can put in the SDBA (for me, it is 50%)?

Another question... Do you (or anyone else) know if there is some advantage (to the company) in restricting SDBA access to mutual finds only?  I assume my company pays Fidelity some overall administrative fee to have them manage their employees' 401k's.  Would they be paying less with mutual-fund-only restriction?  Or is there some other advantage?

Professionally, I am a retirement plan attorney, so I can tell you more about all of this stuff than you would ever want to know.

The short answer is that brokerage windows have tiny utilization rates (even in large companies there are often only a handful of people using them) and all restrictions are normally just arbitrary lines that were drawn at some point in the past.

Also, there is normally an annual fee that the participant pays for using a brokerage window of $50 or so.

For the PP investor, a brokerage window is a tremendous resource.

[MediumTex]

This morning I got a note from the high-level HR person saying that I would be contacted by our tax qualified plans manager for further discussion.

In case I am actually contacted, is there anything beyond what I've mentioned above that I need to say?  Anything useful to know beforehand?

I would just emphasize that you are interested in implementing a conservative investment strategy that does not involve active trading and that expanding the scope of the plan's brokerage window will allow you to do it.

If she asks what is wrong with the plan's basic investment lineup you might compare the returns of basically every fund in the plan in 2008 to the PP's 2008 returns.

I would just keep saying that participants usually use a brokerage window to take on more risk than the plan's basic lineup offers, but that ironically you want to use the brokerage  window to take on less risk.

Thanks.  Good advice.

You might also mention that in many cases there are ETFs that do exactly the same thing as mutual funds, but with lower fees.

One sort of entertaining exercise is to take a 401(k) plan investment lineup and show how participants could use a brokerage window to provide themselves with basically the exact same investment lineup in the form of ETFs and pay lower overall investment management fees.

What I am describing is sort of the 401(k) plan equivalent of the Pentagon clerk who went across the street to Office Depot and saved the government millions of dollars on office supplies when compared to the prices being charged by the official government office supplies contractor.

[Storm]

The point is that a brokerage window 401k shouldn't have arbitrary restrictions placed on it.  My companies 401k is with Fidelity and their brokerage window option allows me to buy anything a Fidelity retail investor can buy - including Treasuries on the secondary market, stocks, ETFs, and even options if I really wanted to.

Agreed, and that's good to hear... my company's 401k is with Fidelity as well.  I thought that maybe it was Fidelity doing the restricting, but obviously that cannot be the case.  Out of curiosity, do you have a limit on the amount you can put in the SDBA (for me, it is 50%)?

Another question... Do you (or anyone else) know if there is some advantage (to the company) in restricting SDBA access to mutual finds only?  I assume my company pays Fidelity some overall administrative fee to have them manage their employees' 401k's.  Would they be paying less with mutual-fund-only restriction?  Or is there some other advantage?

There is no limit on the amount I can put into the brokerage window with my company.  I can put in the full amount, up to the federal limit of $16,500.  For our company, there is basically two options:

• The default option, which is Vanguard Target Date funds closest to your projected retirement date based on your age.
• The brokerage window option, which gives you the freedom to do what you want.  The business day after payday I see a deposit in my brokerage link account, and I can begin trading with those funds immediately if I want to, or let them accumulate in FCASH.

[jackely]

Our company maintains an "ask the executive team" intranet site.  Looking over it, there were a couple questions in 2010 related to expanding the SDBA (one about increasing it to 100%, another about adding ETF's and individual stocks).

Both times, the answer was, "the decisions to exclude ETF's and limit SDBA amount to 50% were conscious ones -- the 401k is a long-term savings plan, not a short term trading portfolio".

So (reponding to your other note), I suspect info showing both better returns and lower volatility will be useful.

Sounds like a hard sell to me. Even if you convince them that the PP is a wonderful long term investment strategy how would this convince them to allow ETF's to be traded? If they let you buy the ETF's you want for your PP, won't they also have to allow everyone else to set up the "short term trading portfolios" they are so concerned about?

[MediumTex]

Our company maintains an "ask the executive team" intranet site.  Looking over it, there were a couple questions in 2010 related to expanding the SDBA (one about increasing it to 100%, another about adding ETF's and individual stocks).

Both times, the answer was, "the decisions to exclude ETF's and limit SDBA amount to 50% were conscious ones -- the 401k is a long-term savings plan, not a short term trading portfolio".

So (reponding to your other note), I suspect info showing both better returns and lower volatility will be useful.

Sounds like a hard sell to me. Even if you convince them that the PP is a wonderful long term investment strategy how would this convince them to allow ETF's to be traded? If they let you buy the ETF's you want for your PP, won't they also have to allow everyone else to set up the "short term trading portfolios" they are so concerned about?

I think that the way you play it is to argue that many ETFs today are much like mutual funds used to be, and the past policy of only permitting mutual funds should be revised in light of this new reality we are in.  In other words, in order for the plan to remain true to the spirit of the rule, the application of the rule may require minor adjustment through the addition of an ETF investment option.

I would not get into how the PP works.  That's a conversation that might not be productive.

[AdamA]

I would not get into how the PP works.  That's a conversation that might not be productive.

Definitely.

I wouldn't mention gold either.

Say you want exposure to US Treasury Bonds (both long and short term).

[Gumby]

I would not get into how the PP works.  That's a conversation that might not be productive.

Definitely.

I wouldn't mention gold either.

Say you want exposure to US Treasury Bonds (both long and short term).

I think the conversation should go down like this — A Few Good Men style...

TennPaGa: You want to know what what the ETFs are for?

Executive: I think I'm entitled to.

TennPaGa: You want answers?

Executive: I want the truth!

TennPaGa: You can't handle the truth! Son, we live in a world that has funds. And those funds have to be invested by people with retirement accounts. Who's gonna do it? You? You, Sir? I have asset allocations that you can't possibly fathom. You worry about short term trading and you curse gold. You have that luxury. You have the luxury of not knowing what I know: that four negatively correlated assets, while risky individually, preserve wealth. And my assets, while grotesque and incomprehensible to you, preserve wealth...You don't want the truth. Because deep down, in places you don't talk about at parties, you want me in those funds. You need me in those funds.

We use words like inflation, deflation, prosperity...we use these words as the backbone to a life spent defending something. You use 'em as a punchline. I have neither the time nor the inclination to explain myself to a man who rises and sleeps under the blanket of the very sweat I provide, then questions the manner in which I provide it! I'd rather you just said thank you and went on your way. Otherwise, I suggest you pick up a pencil and take notes. Either way, I don't give a damn what you think you're entitled to!

Executive: Are you going to buy gold?

TennPaGa: I'm buying the assets I want to.

Executive: Are you going to buy gold!?!!

TennPaGa: You're goddamn right I am!!!

[ozzy]

Gumby! too funny!  I love it!     

[AdamA]

Good stuff, Gumby.

[MediumTex]

On Thursday, I have a 30-minute phone meeting with our "tax-qualified plans manager" person from HR.  She's in her early 40's, but she's only been with the company for 2 years, so she might more easily see the merit in alternative offerings than a long-time employee would.

To summarize the input, my basic story will be:

* ETF's are like mutual funds used to be; investors like and need the opportunities to diversify.
* ETF's offer far more choices than mutual funds.  Also, where they overlap, the ETF's often have lower expenses (example: FLBIX @ 0.20% vs. TLT @ 0.15%).
* In my own case, I'm interested in implementing a conservative strategy that does not involve active trading, and that I can't get via the 401k or the SDBA mutual funds.

That sounds pretty good.

You might also say that there is a pretty good chance that the highly paid employees in the company will also appreciate this change (this is HR's primary constituency), while the lower paid employees are unlikely to be harmed by it.

The highly paid employees in any company (who are also the ones making the decisions about changes like this) are always looking for something that is good for them that won't be bad for the rank and file.  Typically, the opportunity to make more money investing is appealing to senior executives (whether or not they are actually skilled investors).

[MediumTex]

Any other ideas for how I might go about changing their minds?

Keep making the same arguments with patience and persistence.

Be the dripping water and let them be the stone.

[Storm]

Well, crap. 

About 1 hour prior to my phone meeting, the CEO sent out a note where he basically backtracked on what he said at the meeting I mentioned in the opening post ("I like having ETF's, I don't see why we couldn't make them available") to the other tack of "the 401k plan is not a short term trading window."

So the conversation basically went nowhere.

The rep did say that they review the makeup of the 401k plan annually, so I asked how frequently people ask for ETF's.  She said she gets 1-2 questions per year.  So it seems unlikely that things would change.

Also, I forgot to mention the highly compensated employees angle.  Dang.  I think I might send a followup note (she did say "feel free to 'reach out' to me in the future").

I'm not surprised at the response.  It's a relatively old company, we're a manufacturing company, so lots of non-college degreed employees.  Also, the underlying management culture is fairly paternalistic, though it is becoming less and less so every year (a process that began in the mid 1990's).

Any other ideas for how I might go about changing their minds?

Sorry to hear that.  I know this might not be the best option, but a 401k is part of your compensation package.  If you are not being compensated adequately, perhaps it's time to look for a better job.

[moda0306]

tennpa,

I respect our "financial" arm in some respects, and they handle our 401k plan, but our options are horrendous, and they are stubborn to change anything.

It's basically something like this:

8 different US stock funds of various market cap size
1 treasury MM fund (closed)
1 intermediate-term bond fund filled with mortgage crap
1 REIT
1 Emerging Mkts
1 Europacific stock fund
1 Commodity basket fund


I had a good conversation with the "designer" about gold, and LT treasuries (including a conversation about Japan), and he liked what I had to say, but still thought funds with those assets would confuse the average investor and they wouldn't know what kind of risk they'd be getting themselves into.

Yep, you heard that right... they've got a commodity basket and emerging markets, as well as a grab-bag of stock funds, and tell me that those two funds would be adding risky, confusing assets to the pile.

I just got a letter saying they're going to add a plethora of target-date funds... which I hate to their core.

Keep the fight alive, brother.  May the force be with you!

[AdamA]

TennPaGa--

I know I bring this up all of the time, but can you borrow from your 401k?

That might offer you a little bit of flexibility.

[MediumTex]

tennpa,

I respect our "financial" arm in some respects, and they handle our 401k plan, but our options are horrendous, and they are stubborn to change anything.

I had a good conversation with the "designer" about gold, and LT treasuries (including a conversation about Japan), and he liked what I had to say, but still thought funds with those assets would confuse the average investor and they wouldn't know what kind of risk they'd be getting themselves into.

Yep, you heard that right... they've got a commodity basket and emerging markets, as well as a grab-bag of stock funds, and tell me that those two funds would be adding risky, confusing assets to the pile.

I just got a letter saying they're going to add a plethora of target-date funds... which I hate to their core.

Keep the fight alive, brother.  May the force be with you!

Without even realizing it, much of the 401(k) plan industry are like pit bosses in the Wall Street casino.  This becomes clear when talking to them about games without a house advantage.

[patrickjhall]

Without even realizing it, much of the 401(k) plan industry are like pit bosses in the Wall Street casino.  This becomes clear when talking to them about games without a house advantage.

Yes. This.

I helped negotiate our plan last fall. I am a minor equity owner in our 200 employee company. I was able to carve out a self-directed option (even then  only allowed up to 50% of account assets in our SDB). They made us sign a ton of extra paperwork, and would not talk to our employees about it during the plan meetings. I brought it up in the one I attended- the agent  said he "Highly discouraged anyone from using it," calling  it playing with fire,  booga booga booga, etc. Meanwhile  they opt everyone automatically into an actively managed fund with 1.8% fees.

When the plan went live,to get access to the brokerage account, I had to fill out the same form 4 times and place numerous calls to insure it was set up correctly.

[KSActuary]

Several thoughts come to mind....

1. Many 401(k) platforms and broker dealers do not like ETFs because they do not have any revenue share (12b-1 and sub/ta) built in. If they can't get paid or use the revenue share to offset plan administration costs then it can be pretty slow going.

2. Self-directed accounts within a 401(k) plan can create environments where employee educational support is undermined for the rank and file who normally don't use the self-directed option. I see this sometimes in smaller plans (under 100 employees). Because the employer must consider all factors when making administrative and investment decisions as a fiduciary, changes that make their lives complicated have a hard time making the grade.

3. Vanguard has just recently inked some recordkeeping relationships in the small to medium size plan environment so their funds and ETFs will become more available. There are some recordkeepers out there now that allow ETFs but these administrators are on the leading edge with many parts of their recordkeeping efforts.

[TripleB]

Thank the federal government for this nonsense. 

Instead of simply giving people the option to have a $22k IRA annual contribution, they give you a $5k IRA and $17k tied to your employer that gives the employer control over your retirement options.

How much simpler would it be for everyone to just ditch 401ks and instead raise the IRA limit? Fill out a new W4 with the exemptions from your anticipated IRA contribution and your withholding is adjusted appropriately as it would if you were doing a 401k.

Then again, in my imaginary land, the government wouldn't tax investment earnings or at the very least, not tax investment earnings that are below inflation. It seems as though the government gets to print more money, causing inflation, making their debt cost less, while making our savings worth less, and then taxing the earnings we get that are necessary just to match the inflation that they caused.

[KSActuary]

Current thinking in DC is that deferred savings through retirement plans and IRAs cost the US about 90 billion per year. Certain academics feel that this is not a good investment of US tax dollars since most investors just end up losing their investments to the likes of GS anyway. They perceive that the US tax dollars are lost to the investment management industry and it would be better to put everyone on a level playing field. This line of thought has not made much headway yet but the debt crisis may move this further along.

[stone]

Warren Mosler claims that tax advantaged savings accounts cost the US economy 20% of output 
http://mosler2012.com/?page_id=147
"Deadly Innocent Fraud #5 We need savings to provide for investment. Second to last but not least, this innocent fraud undermines our entire economy, as it diverts real resources away from the real sectors to the financial sector, and results in real investment being directed in a manner totally divorced from public purpose. In fact, this deadly innocent fraud drains over 20 percent annually from useful output and employment- a staggering statistic unmatched in human history. And it leads directly the type of financial crisis we’ve been going through.
....They decide we need more savings so there will be more ‘money’ for investment. And to accomplish this they use the tax structure to create tax advantaged savings incentives, such as pension funds, IRA’s, and all sorts of tax advantaged institutions that accumulate reserves on a tax deferred basis.
....But the worst has yet to come. These massive pools of funds (created by the deadly innocent fraud that savings are needed for investment) also need to be managed, and for the further purpose of compounding the monetary savings for the beneficiaries. This is the base of the dreaded financial sector- thousands of pension fund managers whipping around vast sums of dollars, which are largely subject to government regulation. For the most part that means investing in publicly traded stocks, rated bonds, and with some diversification to other strategies such as hedge funds and passive commodity strategies. And feeding on these whales are the thousands of financial professionals in the brokerage, banking, and financial management industries."

Current thinking in DC is that deferred savings through retirement plans and IRAs cost the US about 90 billion per year. Certain academics feel that this is not a good investment of US tax dollars since most investors just end up losing their investments to the likes of GS anyway. They perceive that the US tax dollars are lost to the investment management industry and it would be better to put everyone on a level playing field. This line of thought has not made much headway yet but the debt crisis may move this further along.

[MediumTex]

Warren Mosler claims that tax advantaged savings accounts cost the US economy 20% of output 
http://mosler2012.com/?page_id=147
"Deadly Innocent Fraud #5 We need savings to provide for investment. Second to last but not least, this innocent fraud undermines our entire economy, as it diverts real resources away from the real sectors to the financial sector, and results in real investment being directed in a manner totally divorced from public purpose. In fact, this deadly innocent fraud drains over 20 percent annually from useful output and employment- a staggering statistic unmatched in human history. And it leads directly the type of financial crisis we’ve been going through.
....They decide we need more savings so there will be more ‘money’ for investment. And to accomplish this they use the tax structure to create tax advantaged savings incentives, such as pension funds, IRA’s, and all sorts of tax advantaged institutions that accumulate reserves on a tax deferred basis.
....But the worst has yet to come. These massive pools of funds (created by the deadly innocent fraud that savings are needed for investment) also need to be managed, and for the further purpose of compounding the monetary savings for the beneficiaries. This is the base of the dreaded financial sector- thousands of pension fund managers whipping around vast sums of dollars, which are largely subject to government regulation. For the most part that means investing in publicly traded stocks, rated bonds, and with some diversification to other strategies such as hedge funds and passive commodity strategies. And feeding on these whales are the thousands of financial professionals in the brokerage, banking, and financial management industries."

Current thinking in DC is that deferred savings through retirement plans and IRAs cost the US about 90 billion per year. Certain academics feel that this is not a good investment of US tax dollars since most investors just end up losing their investments to the likes of GS anyway. They perceive that the US tax dollars are lost to the investment management industry and it would be better to put everyone on a level playing field. This line of thought has not made much headway yet but the debt crisis may move this further along.

I'm not sure what the alternative is to saving for retirement.

If a person says "I'm not going to save anything for retirement.  According to MMT, me saving for retirement hurts the overall economy and I'm not going to do it."

When such a person reached retirement age, what funds would be available to provide retirement income?

Perhaps we are just talking about coming up with a better way of allocating retirement savings, rather than suggesting that retirement savings in themselves are a bad thing.

As far as the underperformance of the average 401(k) investor (or even the poor investment performance of many defined benefit pension plans), this is a really serious problem that I think many people are not ready to be honest or realistic about. 

I work in a shop of actuaries and I find that even actuaries often seem to be attached to certain ways of thinking that I would call "folkways" that are simply not well-connected to reality, particularly when it comes to making realistic interest rate assumptions and understanding the role that inflation plays in projected asset returns.

[stone]

Medium Tex, I think he is a fan of pay as you go systems such as social security. That same link has "Deadly Innocent Fraud #4 Social Security is broken....To understand what’s fundamentally wrong at the macro (big picture, top down) level, you first have to understand that participating in social security is functionally the same as buying a government bond. With the current social security program you give the government your dollars now and it gives you back dollars later. That is exactly what happens when you buy a government bond. You give the government your dollars now and you get dollars back later."

He goes into it at some length. You might find that bit interesting as you obviously know massively more about the pension system than me. I know the US social security pension is very minimalist but some pay-as-you-go state run pensions pay out (and take in) a lot such as UK military and civil service pensions. Are US military pensions also run like that (ie with no asset base, just paying current retirees from current workers?
I suppose the other method is Storm's parents in law's -get your children to support you- method .