CMR provides specialized services in the highly technical, continually changing area of employee benefit plans. By integrating employee benefit objectives with a company's overall strategic plan, tax plan and human resource program, we help our clients meet the challenge of attracting and retaining a workforce that will help the company suceed.
The specialized areas of qualified retirement plans and flexible benefit plans are complicated, technical and dense with frequently changing governmental regulations. Our financial and tax expertise allows us to look at a client's total financial and huamn resource picture, so that we are able to recommend, design, install and administer plans that are designed to fit your needs -- not the other way around.
At CMR, we'll recommend a plan that's right for you and your employees. We understand that your company's specific needs will not be met by off-the-shelf, "cookie cutter" employee benefit plans and we will only recommend plans that are designed to help you accomplish your goals.
Some of the plans we might customize to fit your needs include:
- 401(k), 403(b) & 457 plans (including Safe Harbor and Roth)
- Profit-sharing plans (including customized allocation formulas)
- ESOPs
- Defined benefit plans
- Section 125 cafeteria plans
Benefits of a Retirement Plan Investment Advisor
In the complicated, ever-changing world of retirement plans, it’s difficult to stay on top of every detail of your plan. This is especially true given the heightened sensitivity to a plan sponsor’s fiduciary responsibilities; after all, the president just signed the most sweeping reform of America’s pension laws in the last 30 years, and the current savings rate among Americans is negative. It’s a lot for plan sponsors to be concerned with. How is your plan handling these retirement realities? To whom can you turn to act in your best interest and guide you though the maze of plan options and features? The answer may be found in the services of a retirement plan investment advisor.
Assistance With Fiduciary Responsibilities
According to well-known ERISA (Employee Retirement Income Security Act) attorney, Fred Reisch, plan fiduciaries have some of the highest standards of care known to man. An advisor can help you fulfill your very important role as a plan fiduciary. Typical consulting services may include drafting an investment policy statement; assisting in the selection of mutual fund options by following a well-documented, prudent process; monitoring ongoing investment performance; and assisting with service provider selection. This list is not all-inclusive, as retirement plan investment consultants vary considerably in their business models and in the consulting services they offer. Many advisors act in a fiduciary capacity and are willing to accept that role in writing; however, not all advisors are the same, so it’s important to inquire about those services and to understand any service agreements.
ERISA requires that the fiduciaries of employee benefit plans administer and manage their plans prudently and in the best interest of the plan’s participants and beneficiaries. Considering that the plan fiduciaries may have personal liability associated with this requirement, it’s easy to see how the services of an independent consultant could be of value. Careful consideration must be given to the prudent process an advisor uses in selecting and monitoring the investments in the plan. Is their process documented? Is risk-adjusted performance being evaluated appropriately? Does the investment policy statement provide clear direction on when to eliminate an investment from the plan? Is it being followed?
Under the Investment Advisors Act of 1940, an investment advisor providing consulting services has a fiduciary duty to provide disinterested advice and disclose any material conflicts of interest to their clients. Are advisors being paid directly from the investments in the plan? Do you know what those fees are? Is there an incentive for the plan or the advisor to select a certain investment or mutual fund that’s affiliated with the advisor or the record keeper? An advisor that’s independent can act in the best interest of the plan and its participants at all times.
Full Fee Disclosure
One of the many requirements of plan fiduciaries is to control plan costs. This requires that plan fiduciaries know all the fees that are being charged to the plan and participants, which is crucial considering that almost 90 percent of the fees paid by retirement plans are investment fees that are often hidden It also requires that they determine whether these fees are reasonable given the services being offered. In addition, retirement plan investment advisors should disclose their compensation schedule and, if paid directly from the investments in the plan, how much they’re receiving on an annual basis. Payments made directly to retirement advisors from mutual funds or money managers could create material conflicts of interest, and they may cause the plan to pay more than it should in consulting fees. To eliminate conflicts of interest and to ensure that your retirement plan consultant is working for you and in the best interest of the plan, it’s recommended that your retirement plan investment advisor be paid independent of the investments offered in the plan. An advisor that has knowledge of the retirement plan industry can also assist to benchmark total plan costs, investments, and service providers.
Participant Education
The money your staff will need for retirement generally comes from three areas: Social Security, personal savings, and a company’s retirement plan. According to the 16th annual Retirement Confidence Survey, published by the Employee Benefit Research Institute in April 2006, many American workers aren’t ready to undertake the task of financial planning for their own retirement and face the prospect of having to work far longer than they expect. More than half of workers saving for retirement report total savings and investments (not including the value of their primary residence or any defined benefit plans) of less than $50,000 (52 percent). However, the large majority of workers who haven’t put money aside for retirement have little in savings at all: 75 percent of these workers say their assets total less than $10,000. The need for staff to save for their retirement is more important than ever.
According to the U.S. Department of Commerce, Bureau of Economic Analysis, the personal savings rate in the United States through June 30, 2006 is a negative 1.5 percent. The Social Security system will likely experience changes and/or reductions in benefits in the future, which will put an even greater burden on companies’ retirement plans to compensate for that shortfall.
Retirement plan investment advisors can play a critical role in educating and motivating staff to save for retirement. This support can be in the form of consulting on education campaigns or offering creative industry techniques and tools to make it easy for participants to make decisions. Examples include employing automatic plan features that are gaining in popularity like automatic enrollment, automatic salary deferral increases, and automatically investing contributions for participants. Other solutions include designing model portfolios or lifestyle funds to offer participants a simple investment solution or leveraging the tools and resources of record keepers to use multi-media approaches to touch participants.
Investment Portfolio Design: Determining Your Risk Tolerance
Investment success is generally not a result of catching a ride on a hot stock, nor is the achievement of one’s financial goals contingent upon buying the right mutual fund before it rises to the top of the rankings. Certainly, investors would rather hire good managers than poor ones, but their ultimate ability to achieve their financial goals is much less dependent upon that factor than many believe.
While the specific investments comprising a portfolio are an important element, their significance should not be overstated. The starting point for developing an appropriate investment plan is the analysis of one’s current personal financial position. Consideration of the individual’s goals, tolerance for risk, capacity for future savings, current and expected future income, and tax circumstances are all critical matters to be contemplated at the beginning of the portfolio construction process. The effect of each should be incorporated into the plan if it’s to have a high probability of success. Determination of these variables will not only assist in the development of the investment plan itself but will also help to identify the types of investments that are appropriate for inclusion in the portfolio and those that aren’t.
Assessing Risk Tolerance
Only after evaluating these issues should steps be taken to design the optimal portfolio. Connecting financial goals to current resources will almost always require the investor to take risks by holding some combination of investments (e.g., stocks, bonds, alternatives). The balance between investment vehicles should be a function of the investor’s tolerance for risk and their financial goals. The more aggressive the goals relative to the current financial position, the more risk is likely necessary to achieve success. This generally results in a higher allocation to more volatile holdings such as stocks in the portfolio. Conversely, individuals may also find that they’re well-positioned to reach their goals, suggesting that less risk, and a correspondingly lower allocation to more aggressive alternatives, is necessary.
During the portfolio design process, the investor should gain a thorough understanding of the risks involved with investing in a range of investment options. The history of the capital markets provides excellent insight into the volatility of fixed income and equity investments and their potential for gain or loss over short and long periods of time. Well-informed investors should structure their portfolios in a manner that would not allow them to assume more risk than they can bear. A proper asset allocation should position the investor to weather the inevitable storm, riding out any short-term losses while maintaining a long term perspective. Nonetheless, investors also need to allocate a sufficient portion of their portfolios to more aggressive investments to have a high probability of achieving their stated goals. If their tolerance for risk cannot be balanced with the risk required to achieve success, the investor’s goals may not be attainable, and expectations must be reined in.
The Importance of an IPS
Once that asset allocation plan has been determined, it should be formalized in a written Investment Policy Statement (IPS). Upon implementation, the IPS provides the guidelines for the management of the investment portfolio over the long term. It outlines expectations not only for investors but also for the investment consultant and any money managers. Moreover, the quantifiable parameters included in the IPS should assist investors in managing their own expectations. While many investors don’t develop a formal IPS, it’s essential to the effective management of the portfolio. By formally acknowledging the potential range of returns, potential market risks, and reasonable long term returns prior to implementation, investors should be better prepared to adhere to their long term strategies rather than moving to a more conservative portfolio when markets become unsettled, and to resist the temptation to become more aggressive during periods of strong equity returns.
Only after finalizing the IPS should investors consider hiring specific money managers or purchasing mutual funds. Making decisions about specific investments prior to this point would be premature. Even after implementation, a portfolio should be monitored on a continual basis. The dynamic nature of the capital markets may create opportunities or hold greater risk in individual segments of the market over time. Further, investment management firms are dynamic organizations; the investor cannot assume that a well-managed mutual fund or separate account product will remain a winner indefinitely. In this way, the design process is constantly being revisited, and the portfolio can be modified as necessary.
In Conclusion
The world of retirement plans continues to evolve, making it increasingly difficult to monitor your plan effectively. Given the heightened sensitivity to a plan sponsor’s fiduciary responsibilities, it’s never been more important to partner with a retirement plan investment advisor.
