Share Class ABCs: Choose Wisely
Choosing mutual funds for your retirement plan’s investment lineup can feel like wading through a sea of alphabet soup. Fund companies typically offer multiple share classes, each sporting its own unique letter. A shares, C shares, I shares, R shares — what does it all mean? Luckily, you don’t have to be a mutual fund expert to understand the different share classes. Here’s a brief primer to help you understand the basics.
ABCs of Fees
Before diving into the share class alphabet soup, first, a brief word about fees. Each share class of a mutual fund owns the same underlying securities (stocks, bonds, etc.); the only difference is the cost. These come in two basic varieties: expense ratios and sales “loads.”
Expense ratios are the percentage of a fund’s assets used to cover administrative, marketing and distribution (12b-1 fees), and all other costs. Typically paid by participants, these fees are calculated annually as a percentage of an investor’s assets. For example, a participant would pay $150 for a $10,000 balance invested in a share class with a 1.5% expense ratio.
Additionally, certain share classes charge significant sales loads. However, these are typically waived for mutual funds purchased through 401k plans. If this is the case, neither the plan nor its participants pay these fees.
How to Compare Shares
Now, let’s talk share classes. Here’s a primer of the most common share classes:
A shares: Charge a front-end load for sales commissions for financial planners, brokers and investment advisors. It’s paid when shares are purchased and is calculated as a percentage of the original investment. For example, if the opening balance is $5,000 with a 5% front-end load, the fee is $250, making the invested balance $4,750. Within retirement plans, these costs are generally waived in retirement plans.
C shares: May be “no-load” funds, or those that carry a back-end load, in which an investor may pay a sales charge — typically 1% — if shares are sold within a specific period of time (generally less than a year). However, within retirement plans, a back-end charge is typically waived. Class C shares also carry higher expense ratios than A shares.
I shares: Known as “institutional” share classes, I shares typically carry much lower fees than A or C shares. While A and C shares are available to most plans of all sizes, they are mostly accessible to larger plans.1
R shares: Specifically designed for retirement plans, R shares range from R-1 to R-6. R shares typically don’t have front- or back-end loads; however, they may potentially carry a revenue-sharing component. As such, expense ratios vary: those with 12b-1 marketing and distribution fees may range from .25% to .1%. It is worth noting that R-6 shares generally have no 12b-1 or servicing fees, although they are typically only available to plans with assets of $10 million to $250 million.
CITs: Collective Investment Trusts (CITs) are the new kids on the investment block. They are similar to mutual funds; however, there are major differences. CITs are not registered; therefore, their administrative expenses are typically lower than those of mutual funds because they are not subject to the many regulations that mutual funds must abide by. Mutual funds are open to the public, whereas CITs are not, and are designed to be part of a specific 401(k) investment strategy. Keep in mind that CITs do not have traditional Ticker Symbols, so while they might have lower costs, there is also a lack of investment transparency. As a plan fiduciary, it is a best practice to truly understand the investment structure, weigh the potential cost savings, and compare the benefits with implementing CITs.
What’s more, new share classes — T and “clean” shares — have emerged in response to changing regulations. These share classes are designed to promote greater fee transparency and level the playing field on commissions for financial professionals, while enabling plan sponsors to distinguish investment costs from plan costs.
The bottom line: when selecting and reviewing mutual funds
for a plan’s investment menu, it’s important for sponsors and fiduciaries to
understand the different share classes and their related fees, as well as how
they impact plan costs and participants’ ability to optimize their retirement
savings. As you review the many different options available out there,
remember: “you must choose, but choose wisely.”
 Morningstar Office. “What is a Collective Investment Trust?” November 2018.
Is your 401(k) plan documentation file ready for an audit?
As a retirement plan sponsor, a fiduciary audit file checklist will help you to compile documents to keep your fiduciary audit file up-to-date and assist with periodic reviews of your plan.
These documents should be readily at hand in the event that a DOL auditor shows up. This becomes easier if the advisor maintains an online filing cabinet for these and other plan documents that are also accessible to the plan sponsor.
Four Tips to Boost Your Employees’ Retirement Outlook
As many employees look ahead to retirement, 47% of workers feel somewhat confident that they’ll have enough money saved to retire on time and then live comfortably.1 However, forward-thinking employers have the ability to help their employees work toward a confident and happy retirement. According to the 2018 Retirement Confidence Survey from the Employee Benefit Research Institute (EBRI), only 17% of American workers feel very confident in their ability to live comfortably in retirement. Additionally, their 28th annual survey found that another 47% of workers feel somewhat confident about living comfortably in retirement. That means that over 64% of Americans (or 2/3 of your workforce) feel prepared for their retirement future.
To help boost confidence, here are 4 forward-thinking tips proactive employers can do to help improve your employees’ retirement outlook:
Amp Up Auto Features
The majority of plans, nearly 6 out of 10, have already adopted auto-enrollment. A lot of plans started years ago; but back when many employers implemented automatic enrollment, it was at a 3% default deferral, with no auto-escalation feature.
If you’re auto-enrolling employees at a low rate like 3% and leaving the deferral rate there, consider that many retirement-savings experts believe that Americans need to save 12% to 15% every year. Relying on a 3% deferral, even with a match, may limit your employees’ chances of reaching their goals upon retirement.
We can help you figure out whether a higher
initial deferral rate makes sense for your participants and for your
organization’s budget constraints on match spending. Auto-escalation has become
the new norm: 73.4% of auto-enrolling plans now have this feature.2
Strengthen the Match
Many employees take their cue on how much they should save for retirement from the message you send with the employer match you offer. Match 100% of the first 3% of pay that an employee defers, for example, and employees may think they need to save 3% a year to have enough for retirement. In reality, they most likely will need to save more.
We can work with you to analyze your options for a match formula that can help your employees save more for retirement. For some sponsors, this means implementing a “stretch” match that requires employees to contribute more to get the full employer match: Instead of a 100% match on a 3% deferral, for instance, a plan could match 50% up to 6%.
Other employers, realizing the long-term
costs to the company if employees do not retire on time, have decided that it
makes business sense to offer a more-generous match to employees. According to
the 60th Annual Survey of Profit Sharing and 401(k) Plans by the
Plan Sponsor Council of America, it was found that employer contributions have
increased to an average of 4.8% of payroll, up from 3.8% in 2007.2
Move Forward on Re-enrollment
Even if you auto-enroll, all your eligible employees may not experience the benefits. Many employers implement automatic enrollment only for new hires, not employees already working at the company when auto-enroll started. And some new hires likely opted out of enrollment when they joined the organization, or later reduced their deferral because they faced a budget crunch at the time. They may be in better financial shape now, but most won’t take the initiative to sign up on their own for participation in the plan.
Think about re-enrolling all eligible
employees currently not participating in the plan and eligible employees
currently contributing less than the initial default deferral rate. So, if you
use 6% as your initial default deferral rate, for example, the re-enrollment
could include non-participating employees and active participants saving less
than 6%. Some employers do a re-enrollment as a one-time event, while others do
it every year. We can help you evaluate whether re-enrollment makes sense for
Send Targeted Messages to Low Savers
Research has shown that people respond more to communications that have been tailored to them individually. Fortunately, recordkeepers have made big strides in their data-crunching and customization capabilities in the past few years. Now they can more easily drill down and identify particular groups of participants in a plan–such as those saving below a particular percentage of their pay—and then do an education campaign targeted to that group, personalizing the communication for each participant.
Consider moving ahead with a customized communication campaign to low savers in your plan, such as those participants not currently contributing enough to maximize the match. We can serve as a liaison between you and your recordkeeper to coordinate a targeted campaign to a particular group of participants.
Risky Business: Why Plan Governance Matters
Participant-driven lawsuits are on the rise, and employers are facing heightened scrutiny of the way they manage their retirement plans. In today’s continually-evolving regulatory and legal environment, it’s more important than ever to make sure your organization’s retirement plan is both effective and compliant. A well-structured retirement plan governance program can help you pursue these goals when aiming to limit fiduciary risk and improve plan performance, while striving to boost participant outcomes.
What is retirement plan governance?
Simply defined, governance outlines the processes and policies for managing a retirement plan as well as the roles and responsibilities of everyone involved. It provides a framework for effective decision-making on all aspects of the plan, from plan documents and investments to operations and financial reporting.
Why is plan governance important?
The stronger your governance, the stronger your plan. An effective governance program details processes, roles and responsibilities for all parties involved in managing the plan and helping support its objectives. It should address how duties are delegated and to whom, and the documentation and oversight of all responsible parties to the plan. Perhaps, most importantly, proper governance procedures help reduce plan fiduciaries’ exposure to personal liability for actions and decisions made on behalf of the plan and its participants. Finally, a successful governance program enables plan fiduciaries to work together towards the same goals, which can potentially improve plan performance and participant outcomes.
What can you do about it?
Governance best practices include documenting every aspect of the plan’s day-to-day management, along with long-term operating procedures, such as:
Of course, all of this documentation must be updated and maintained on an ongoing basis.
Wrapping It Up
Straightforward retirement plan governance guidelines and best practices help toward ensuring that your plan is compliant and continues to run smoothly, and that fiduciaries can confidently and successfully fulfill their responsibilities. Moreover, having carefully documented plan governance procedures can assist you in preparing for and managing plan audits and compliance reviews, increasing your plan’s efficiency and improving your participants’ experience1.
To recap, an effective governance program:
While governance programs are typically established when the plan is adopted, it’s never too late to develop or update governance procedures. Keep in mind, an effective governance program provides a carefully documented record of the plan fiduciaries’ efforts to manage and maintain the plan prudently in the best interests of its participants and their beneficiaries. Doing so helps all parties clearly understand and carry out their roles and responsibilities, and it helps manage their fiduciary liability.
Is it time to review your plan governance program? We can help. Contact us today for a comprehensive evaluation of your governance processes and policies.
New Year, New Topics! Plan Sponsor Need to Knows for Q1 2019
Ringing in the new year comes with changes to the 401(k) world, and as a plan sponsor, we want to keep you informed and educated. This past quarter, we’ve focused our attention on “Fiduciary Plan Governance” our latest newsletter features our insights with the following articles:
How protected is your company 401(k) plan?
Cyber crime is on the rise worldwide! What can you do to protect your plan assets and information? Watch our short 2-minute video to learn the 5 proactive measures plan sponsors should consider to prevent cyber attacks.
New year, new contribution limits!
The IRS has announced cost of living adjustments affecting dollar limitations for pension plans and other retirement-related items for tax year 2019. For company retirement plans, the most recognized highlight is the 401(k) contribution limit increase to $19,000 for the new year.
Are your participants considering 401(k) loans?
It’s very common that 401(k) plan participants suffer financial hardship; thus, 401(k) loans are made available to them. However, there are a couple of important factors for them to take into consideration before they access the loan.
Help guide your participants in the right direction! Our newest infographic will review what they should know before taking a loan from their 401(k), and offer tips to help avoid the need for a 401(k) loan.
Cyber-crime is on the rise worldwide. As a result, growing numbers of organizations are taking critical steps to protect their valuable electronic data from hackers and other cyber criminals — a process known as cybersecurity. It’s serious business, and a trend retirement plan sponsors and committees should pay attention to.
In 2015, IBM’s chair, president and CEO Ginni Rometty said, “Cyber-crime is the greatest threat to every company in the world.” Last year, billionaire investor and businessman Warren Buffett echoed that sentiment, claiming that “cyber-attacks are a bigger threat to humanity than nuclear weapons.” In short, cyber-crime is extremely dangerous, and many businesses are vulnerable to cyber-attacks — some without even knowing it.
Why is cybersecurity important?
Thanks largely to the proliferation of high-profile cyber-attacks and data breaches that hit organizations in 2017 (including Equifax, which exposed the personal information of nearly half of Americans), Gartner Group has estimated worldwide cybersecurity spending will reach $96 billion in 2018. Moreover, information security research firm and publisher Cybersecurity Ventures predicts that, by 2021, cybercrime will cost the world $6 trillion annually. A single successful cyber-attack can cost an organization more than $5 million, or $301 per employee, according to the Ponemon Institute. Clearly, the costs related to cybersecurity threats are significant.
Beyond the expenses related to a potential cyber-attack, there are a number of reasons why retirement plan sponsors and committees should focus on specific cybersecurity efforts to protect their plan assets and information. For starters, if you think your plan isn’t a target, think again. It’s not a matter of if, but when your plan gets hacked.
Here’s why: Recently, cyber attackers have begun to set their sights on plan sponsors themselves rather than their recordkeepers and custodians because they know that the former typically lack the sophisticated cybersecurity defenses of their vendors.
Cyber criminals also know that defined contribution (DC) plan sponsors and their vendors manage large amounts of money, and in so doing, collect highly sensitive personal data from plan participants and their beneficiaries, including names, address, birthdates, and Social Security numbers. This information is extremely valuable to hackers because most of it is permanently associated with an individual and can’t be changed or cancelled like a credit card or bank account information.
Enrollment data such as account balance, direct deposit and compensation/payroll information is also at risk, and therefore, potentially vulnerable to a cyber attack if not properly handled and protected by plan sponsors and their third party vendors. Therefore, it’s critical for sponsors to address cybersecurity within their own organizations, as well with vendors such as recordkeepers, trustees, TPAs and investment advice providers, which receive personal data from the plan.
Some examples of cyber threats to retirement plans might include fraudulent distribution or loan requests, or ransomware attacks and phishing techniques where a hacker might obtain log-in credentials (i.e., through a stolen laptop or mobile device storing personal data and passwords) to access participants’ account information online.
What is my responsibility?
While retirement plan information is protected under specific regulations, there are no comprehensive laws that protect plan sponsors and service providers against cyber threats, like there are for group health plans (i.e., the Health Insurance Portability and Accountability Act, or HIPAA). Nonetheless, plan sponsors must act in a fiduciary capacity under the best interest clauses of the Employee Retirement Security Income Act (ERISA), the law that governs retirement plans. In addition, sponsors must adhere to the data privacy requirements for electronic notices. The following graphic breaks down the regulatory guidelines for plan sponsors’ fiduciary duties related to cybersecurity and electronic distribution of plan information:
Several states also have laws governing the protection of employees’ social security numbers and employers’ responsibilities to notify employees in the event of a security breach. However, these laws are designed to regulate the employer rather than the plan sponsor, so ERISA would likely take precedence in a retirement plan-related cyber-attack.
What can I do to protect plan assets and information?
Most organizations take a reactive approach to cyber-attacks, addressing them only after an incident has occurred. However, that can be expensive, complicated, and mostly ineffective.
Plan sponsors have an opportunity to proactively address and manage cyber security risks using a variety of tactics to improve their ability to prevent, detect and respond to cyber-attacks.
First off, assume that your company’s retirement plan will be attacked. When setting up defenses against cyber threats, consider addressing the following questions:
In addition, plan sponsors should:
Moreover, sponsors should also encourage plan participants to:
Cyber threats are evolving and becoming more sophisticated every year. As such, plan sponsors must do their best to try to stay one step ahead of hackers by heightening their cybersecurity defenses to protect the personal information of participants and their beneficiaries.
Retirement plan fiduciaries can take proactive steps to help secure sensitive retirement plan data. The challenge for many is knowing where to start. We hope this article provided several key steps plan sponsors and retirement committees can take to boost their cybersecurity protections and fortify their plans against insidious cyber-attacks.
Did you know cybercrime is a possible threat for your company 401(k) plan?
Technology is evolving fast, but cyber criminals are evolving just as fast. Cyber criminals are now going after plan sponsor’s company 401(k) plans, and you could be liable if disaster strikes!
You should be aware of the multiple cyber threats that can affect your plan and the protective measures available to help you thwart those threats. Our guide provides you with many ways you can help protect your plan, inform yourself of possible threats, and engage plan sponsors to actively protect their accounts.