Well, if the stock market caught you off guard again … “fool
me once, shame on you! But, fool me twice, shame on me!” Do your company and
your employees want to continue on a stock market roller coaster? What do you
think will happen to the stock market if, for example, Israel strikes Iran with
nuclear warheads (and I’m pretty sure it will happen)? Will your employees ever
be able to retire voluntarily?
- Are you are still providing target-date funds to your employees with large equity positions near retirement? I have found that
there are at least two major flaws with target-date funds. First they have some
of the highest invest fees that will reduce your employee’s rate of return (I
talk about investment fees below.) Second, they are supposed to de-risk an
employee’s investments as they reach the end of the target-date. Most of these
funds have way too much equity investments at the end of the target date.
- Have you failed to add good fixed income alternatives or annuity options for your employees? Traditional bond funds may
be a bad choice. Interest rates are so low that the only can go up. When interest
rates go up, the value of bond funds go down. Have you considered Guaranteed
Investment Contracts (GICs) from an insurance company? GICs provide a guaranteed
rate of return for a certain period of years. Or, you may want to consider an
insurance company annuity option for your employees that will provide them with
a lifetime, guaranteed income stream.
- Have you looked at the fees that your employees are paying in the investment funds that you selected? You will have to disclose
to your employees the total annual operating expenses expressed as both a
percentage of assets and as a dollar amount for each $1,000 invested. Will you
be able to defend your company’s decision to offer the funds they do when your employees
will see the investment expenses that they are paying as compared to, say, low cost ETF funds? They may ask (and
their lawyer may ask): Why didn’t you give me a choice of low cost funds to
invest in? This may be a breach of your fiduciary duty.
- If you have a Defined Benefit (DB) plan, are you still advocating “buy and hold” investing with large equity positions and haven’t
yet bought into the actively managed, liability-driven investment strategy? DB
plans have a predictable payout stream. In essence, the liability-driven
investment strategy (LDI) is an investment strategy of a company based on the
cash flows needed to fund this future payout stream. The investment objective
should be to have the DB plan assets equal the DB plan liabilities at some
point. An actively managed, LDI strategy will meet this objective. The “buy and
hold” investment strategy will only meet this objective by chance.
What have you been thinking during the last 10 years in this
horrible economy, devastating home prices, the Greatest Recession and 3 wars?
Do you still have on your rose colored glasses hoping for a return of a 1990s
bull market? I think that this is a new world and we have to adjust our
expectations. The last 10 years should be a good “lesson learned”: Protect your
plan sponsor and most importantly … protect plan participants. If not, you may
face three strikes and you’re out … and we may be talking about you and your