MedTex- Quick 401k ?

[hrux]

As you are aware recently I have been added to my company's 401k plan committee and we are in the process of setting up a new investment plan using exclusively low cost index funds, maybe the Permanent Portfolio and offering a self directed brokerage option.

However, I recently received conflicting advice to this strategy from a colleague whom I trust and would appreciate hearing all of your thoughts on whether actively managed funds should be included and if offering a self directed option is a prudent thing to do? The following is a summary of his feedback:

"As far as self-directed, one would think self directed would protect the fiduciary. I have been told by alleged “experts”? that it can actually open you up to more liability because participants are given a menu of options without the proper tools to guide them. I don’t know that this is true, but definitely something you may want to explore if you decide to go that route. I’ve seen enough large companies with self-directed options that I question whether it is true (although they have had restrictions sometimes, like mutual funds only)."

"I do think offering low cost index funds should be included as an option, but you may also be opening yourself up to liability if it is your only option. Having actively managed funds only available through self directed may be an issue, because of minimums, transaction fees, etc., so you may want to consider actively managed options thru the plan where you can use your clout to get better pricing. Yes, there is risk, but I have been told that as long as you’ve gone through a reasonable due diligence process you should be protected as a fiduciary."

"If the market would tank for an extended period of time, you can bet there will be lawyers knocking on the doors of participants who lost money. The financial and time liability could be much greater in the future than it has in the past. Since 401ks have been around we have generally been in a bull market in everything. Now participants have higher balances and fewer have pensions and other income sources to rely on. The risks have grown in my opinion."

"If you are looking to balance protecting yourself and the participants, I think actively managed asset allocation funds are great options. Of course, you want to choose the ones that are unlikely to blow up participants, but I am starting to see some like Blackrock GA & PIMCO AA more frequently offered as options. I haven’t seen TIPs offered too often, but I also think that is a good, safe option that can be easily offered. Gateway is now on a few platforms, due to its affiliation with Natixis. That may be a viable option as well."

[AdamA]

That is very eye opening, and explains a lot about why 401K options are the way they are (as far as limitations are concerned). 

Curious to hear what others have to say about this.

[MediumTex]

Although many plans offer brokerage windows, they are utilized by a tiny tiny tiny percentage of 401(k) plan participants.

There is little to no risk in offering them.

I would, however, seek advice from whatever professionals you are relying on in your plan design with respect to brokerage window issues.  In my practice, I have seen many things broken, screwed up and/or poorly thought out, but I have never seen a client with a brokerage window issue.

[cowboyhat]

If fiduciary concerns are a driving force, why not just offer everyone a Vanguard or Fidelity IRA and recommend they discuss their situation with a financial consultant. Fidelity would jump at the chance to provide Financial Consultations. If there is a problem later let Fidelity parse it.

[AdamA]

If fiduciary concerns are a driving force, why not just offer everyone a Vanguard or Fidelity IRA and recommend they discuss their situation with a financial consultant.

It's the financial consultant part that will get many people into trouble.

[julian]

You should check with the professionals u have hired. But with that said, you should offer both active and non active managed funds along with 3 models; conservative, balanced and agressive along with a money market option.In this case more is better. Even though all of us believe in the PP we do not have the right to force it upon anyone. In fact, thankfully, a lot of ppl do not understand the PP (saves us from the dreaded bubble)

[AdamA]

. Even though all of us believe in the PP we do not have the right to force it upon anyone.

Agree completely.

In fact, thankfully, a lot of ppl do not understand the PP (saves us from the dreaded bubble).

I don't buy this.  Even if millions of people used the PP and then suddenly bailed out, wouldn't one of the asset classes still perform well?  People have to put their money somewhere.

[julian]

Like any investment. the less ppl involved the better. But with that said, our investments are so large & liquid u r right that it is prob impossible to put the HB PP in a bubble. I think it is more psychological that if everyone like it, it can no longer work.

[moda0306]

If people really started to "over-buy" into the PP, you'd see some combination of the following:

1) Gold is historically very high compared to other commodities, currencies, etc as people, as a rule, aren't buying those assets.  One could argue this is now the case to some degree.

2) Treasury-Corporate and treasury-muni spreads are high as people, as a rule, aren't buying those securities.  I'm not 100% sure on this, but I think those spreads are currently historically high.

As far as stocks go, I don't necessarily think people bringing those down to 25% of their portfolio would do anything to make them high.  If anything, the stock market would be underpriced if the PP started to universalize.

I don't think the PP being overpriced would be because it's failing to capture a market phase, but because the assets it leaves out would get ignored no matter how good they are.  What if the yield spreads go to 10%... nope, we're still not allowed to buy corporates.  Why?  Because we believe the market is sorting these rates out more efficiently than we can.  Well, what if too much of the market starts buying into the PP concept?  What if the "market" starts not caring about rates and way too many $ end up flooding PP assets while others get ignored?  Just trying to keep an open mind.

[AdamA]

Well, what if too much of the market starts buying into the PP concept?  What if the "market" starts not caring about rates and way too many $ end up flooding PP assets while others get ignored?  Just trying to keep an open mind.

I would think there would eventually be a "the PP doesn't work anymore" sentiment, and people would eventually sell out of it...maybe chase yields on corporates or whatever.  Might cause PP to have a bad year or two, which would give those who stuck it out a good chance to rebalance.