For many individuals, their employer offers a pension plan. In years past, the primary plan was a defined benefit plan. This type of plan spelled out the benefit the employee was to receive and when. It was up to the employer and plan administrators to manage the plan’s assets and insure the values were sufficient to meet the future expenses of the plan, the employee pension payments. For these plans, the investment selection and management was taken care of by the plan and employer. The employees could relax and once retired, receive the monthly pension check provided by the plan.
Somewhere in our past, there was a shift from defined “benefit” plans to defined “contribution” plans. A 401-k plan, individual retirement account, and 403b plans are all examples of a defined contribution plan. The rules define what can be added to the plan each year, but there is no guarantee of the future benefit. Along with the shift to defined contribution plans, came the responsibility of investment management.
There are a number of professionals involved in these plans. There are the product providers like John Hancock, Fidelity and others; plan administrators and Trustees, plan advisor, the employer, and of course the participants. New regulations are currently being rolled out which will impact everyone involved in the plan. Many of the new rules are to make certain the plan is fair and those responsible for the administration of the plan are performing their tasks. Other new rules pertain to the costs of the plan.
The new rules are also forcing all plans to disclose all of the costs associated with the plan. Whether it was known or not, all retirement plans have costs which are associated with them. “Nothing is more expensive than free…” Anyone under the impression their plan did not cost anything will be surprised in the coming quarters once all plans are disclosing the costs on the quarterly statements, especially those costs paid by the participants.
It might be asked, “Since there are costs associated with the plan and plan administrators, Trustees, providers, and advisors are all being paid, then which one is managing the investments?” The answer in most cases, none of them. Of all the tasks required to keep a plan in place and functioning, the actual investment selection is generally left up to the participant. Many employers and providers offer educational seminars to assist the participants with the management of their plan assets, but not the actual management. In the past, the advisor for the plan often made themselves available to participants and provided guidance with regards to investment selection. This service is being impacted by some of the new and pending rules. While the new rules did not intend to reduce the amount of assistance available to participants, unless changes are made, how participants obtain help with the management of their assets will be impacted.
The management of the plan assets is one of the most important jobs. As an example, a participant adding $3,000 per year to their plan and has everything going into a balanced account could achieve a $123,000 balance after twenty years. This represents contributions of $60,000 by the employee and a seven percent average return. However, if the employee had their assets managed by themselves or professionals and realized a 1.5 percent higher return, their future balance after the same period and contributions could be $145,000.
Today, many employees will be covered by some type of contribution plan for most of their working career, which means they may be contributing to plans for 40 to 45 years. The impact of their future plan value and thus the retirement income could benefit greatly if the plan assets were managed from the beginning to the end. Plan assets should not be forgotten. Just because the contribution is made automatically, ignoring the quarter-by-quarter or annual investment impact could do more harm than good.
For assistance with portfolio allocations, insurance, estate planning, or investment management contact me at Quality Financial Concepts or one of the other Certified Financial Planners in our area. To continue a personal quest for education, you can also view our learning center on our website, www.goqfc.com. There you will find articles on a variety of topics, on-line seminars, calculators, as well as a host of other free tools.