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Submitted by: Bill Brennan and Michael Byman
Bill owns Capital Management Group, LLC. He has more than thirty years experience as an advisor on personal finances, taxes and investments. Bill has been recognized by Washingtonian magazine and other publications as one of the top financial advisors in Washington, D.C. Michael handles business development for Capital Management Group, and is currently pursuing his CFP designation.
If your company sponsors a 401(k) or other defined-contribution retirement plan, you may be familiar with this problem: a lackluster menu of investment choices with high (and possibly hidden) investment expenses. This can not only erode participants’ investment growth, but also create legal liability for your firm, which has a “fiduciary” duty to look out for plan participants’ best interests.
At the root of the problem is the conflict of interest inherent in the business model of the large financial institutions dominating the retirement plan market. These providers offer their own funds and/or funds selected as a result of marketing relationships with other fund companies – meaning the best interest of participants may be at risk. The inducements to favor certain funds are so insidious that these companies are prohibited from providing personal investment advice – except via impersonal computer models that will ensure objectivity. To make matters worse, investment expenses are often “bundled” with other fees – impeding the sponsor’s ability to monitor expenses being deducted from participants’ accounts.
This arrangement can put a double whammy on the plan sponsor’s fiduciary responsibility: it produces a poor choice of investments and insufficient oversight of investment expenses.
You could have your business create its own slate of investments and use an independent Third Party Administrator (TPA) to handle the administration. As plan sponsor, this does give you better transparency and control; but unless you have an investment expert on staff, you may not be doing your firm or your participants any favors!
The solution? Enlist a Registered Investment Advisor to establish the investment choices and recommend investment strategies for the plan participants. Independent advisors are free to choose funds according to criteria that matter most to plan participants – such as appropriate diversification, consistent management and low expenses.
An advisor can help you select a third party administrator and a custodian to complete the service package for your plan. This approach brings together specialists in each area of retirement plan management. Ideally, your solution will include:
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A Registered Investment Advisor for investment selection and advice;
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An administrator with open architecture, transparent fees and a full compliment of sponsor and participant services;
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A custodian with a low-cost, industrial-strength institutional trading platform.
Configuring your company-sponsored retirement plan in this way can reduce liability and simplify operations for your firm, and optimize retirement portfolios for your employees.
This article appeared in Capital Management Group’s December 2006 newsletter. You can find the complete newsletter and register for a complimentary subscription to future issues at WWW.CMG-LLC.NET .
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