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Percentage of trustee/participant directed 401k plans


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Knowing no real facts on the subject, to get the ball rolling I would guess something like 80% participant directed 20% trustee directed.  Why would any sane trustee want the entire fiduciary burden of making investment decisions to rest on his or her shoulders?  It is, after all, 2017, not 1995!

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For Form 5500, codes 2G and 2H refer to whether an individual-account plan has participant-directed investment, in whole or in part.  Code 2F refers to whether a fiduciary intends to meet conditions that would allow an ERISA § 404(c) defense against a fiduciary-breach claim.

 

spiritrider, if you or your client wants the breakdown between participant-directed and not, consider asking a data collector (perhaps one that advertises on BenefitsLink) what fee it would charge for pulling the Form 5500 data on your question.

 

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The DOL actually publishes statistics based on Form 5500 data.

Go to https://www.dol.gov/agencies/ebsa/researchers/statistics/retirement-bulletins/private-pension-plan

The most recent statistics were published in September of 2016 and uses the 2014 data so it is slightly dated but it takes time to compile and put together the report.

Look on page 49 of the report (pdf page 53) and it will give you the stats for participant direction

 

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Note this isn't just 401(k) plans this is all DC plans.  So this would include ESOPs which almost never have anything other then trustee directed.  There  are a few KSOPs and a very rare ESOP that allows for participant direction of their diversification accounts inside an ESOP. 

Going back to my days when I did balance forward DC plans and ESOP (2009 was the last year) my experience is very few 401(k)s don't allow some kind of direction.  Even the balance forward PSP and 4ks we had still allowed quarterly or monthly changes. 

Primary reason we had any PSPs or 4k plans that were balance forward was becasue the sponsor wanted something about that plan's running the large plateforms wouldn't give them.  They had favored investment advisors or some servce our practice was willing to give them if they paid us for the service.  We weren't the cheapest TPA by a long shot but we pretty much gave you what you wanted. 

For example:

We had a client that had favored investment advisors.  They wanted us to give them monthly reconciliation and earnings allocations that included specific guidelines on the ROI for the advisors within days of the statements coming out.  If the advisors missed the agreed upon ROI benchmark too many times they were replaced.  On the annual statements it included a life to date break down of the companies PSP contributions by year.  For some people it went back to the late '60s.  This had a total so the person could see how much of their account was company money vs earnings.  They put in a near maximum PS contribution every year for their people.  They paid us great money for those services and were happy as can be. 

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For example:

I *HAVE* a client that takes a very paternal approach to all things benefit related.  They have less than 20 eployees and I can count on one hand the pre-retirement terminees in the last 10 years.  The company has been around for over 40 years and the plan for over 35. They started out, as you would imagine, with balance forward because what else was there, other than big hair, in the early 80's? They engaged a classic investment management firm that publishes quarterly "state of the world" investment philosphy newsletters and issues quarterly statements to the Trustee with everything one would expect of a professional investment management firm.  The client is a family run business and the founder's progeny have steered the company as well and as profitably as the prior, now long since retired, generation did.  The average account balance for the non-owners is north of 1/4 million. The company distills the information received from the investment advisors quarterly and lets the employees know how things are going (in good times and bad... 2008 is a distant [and bad] memory).  The company benchmarks fees no less frequently than every three years and has long since reduced administrative fees to less than 10 basis points (I kid you not). The investment management firm meets frequently with the Trustees.  Every once in a while somebody mentions the potential advantages of participant direction but the employees will have none of it.  The company certainly doesn't need a participant directed qualified plan to attract talent, it does so quite well without it.  The Trustees (who are also the owners of the company) feel that they are addressing their fiduciary responsibilities professionally and responsibly and that they owe their employees every bit of effort they put into comunicating and running the plan.  In short, I think that balance forward plans are most successful when there is long term stability - and that doesn't happen very often any more so the market has turned somewhat of a deaf ear to such client's needs.  Did I mention this is a 401(k)?  And that it would pass the ADP test each year with plenty of room to spare (even though the design is, as you would guess, a safe-harbor).

I think the real losers in participant directed plans are the participants. And I think this has come about because the true professionals in the investment management world have found it more profitable to attract non-ERISA monies and have abandoned ERISA plans for the most part.

But I, too, am surprised at the statistics because I would expect plans that do not offer participant direction to be, at most, in the single digits.

 

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I have a lot of 401(k) plans that are trustee directed.  Most of them are 20 participants or less, and all of the non-owner participants have done much better than non-owner participants in my other plans that are participant directed.  Another interesting characteristic of these plans (at least my plans) is that they have very little leakage because the plan sponsor wants to make sure that his/her employees actually have assets left when they retire.  Very few of them offer loans, hardships, or in-service distributions.  

 

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3 hours ago, RatherBeGolfing said:

The DOL actually publishes statistics based on Form 5500 data.

Thanks, this is helpful.

6 hours ago, My 2 cents said:

Knowing no real facts on the subject, to get the ball rolling I would guess something like 80% participant directed 20% trustee directed.  Why would any sane trustee want the entire fiduciary burden of making investment decisions to rest on his or her shoulders?  It is, after all, 2017, not 1995!

Based on the link to the DOL statistics, the percentage where the participants direct all investments for the 250-499 range of this plan, is ~90%.

The board members and overwhelming sentiment of the employees that they want a new participant directed plan. It is the CEO who is the source of all the objections. He claims that the company would have to provide hours of training annually and this would make the board members liable. The word is that he is very tight with the investment advisors and thy are probably providing him with the objections. They have a lot of money (six figures/year) to lose.

47 minutes ago, Mike Preston said:

...

I think the real losers in participant directed plans are the participants.

I appreciate your perspective and there isn't much to disagree with, especially the above sentence. Participants can be their owned worst enemy.

The eight figure plan assets are invested entirely in individual stocks. The advisors have actually tracked their benchmarks pretty well. Trailing by less that 1%/year before expenses, but the plan administrative/recordkeeping cost are more like an additional 50 basis points.

 

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3 hours ago, My 2 cents said:

Looks as though more than 60% of the plans over 1,000 participants are entirely participant-directed with another handful partially participant-directed.  Below 1,000 tends more toward non-participant-directed.

 

3 hours ago, jpod said:

Is anyone surprised that these percentages are so low?  I find it very surprising. 

 

3 hours ago, TPAJake said:

That seems very low

 

1 hour ago, Mike Preston said:

But I, too, am surprised at the statistics because I would expect plans that do not offer participant direction to be, at most, in the single digits.

If you go to page 51, it uses 401(k) type plans rather than all DC plans.  The percentages here are probably more in line with what is expected

8.7% (46,696 / 533,769) are trustee directed

2.7% (14,403 / 533,769) offer limited participant direction (probably on the 401(k) portion)

88.6% (472,669 / 533,769) are participant directed

79% of the  trustee directed 401(k) plans have less than 25 participant

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15 hours ago, spiritrider said:

Thanks, this is helpful.

Based on the link to the DOL statistics, the percentage where the participants direct all investments for the 250-499 range of this plan, is ~90%.

The board members and overwhelming sentiment of the employees that they want a new participant directed plan. It is the CEO who is the source of all the objections. He claims that the company would have to provide hours of training annually and this would make the board members liable. The word is that he is very tight with the investment advisors and thy are probably providing him with the objections. They have a lot of money (six figures/year) to lose.

I appreciate your perspective and there isn't much to disagree with, especially the above sentence. Participants can be their owned worst enemy.

The eight figure plan assets are invested entirely in individual stocks. The advisors have actually tracked their benchmarks pretty well. Trailing by less that 1%/year before expenses, but the plan administrative/recordkeeping cost are more like an additional 50 basis points.

 

Commenting on the 2nd paragraph above - wouldn't having the sponsor making all the investment decisions concerning the 401(k) assets be much riskier, from a fiduciary responsibility standpoint, than allowing the participants to direct the investments?  And please, don't get me started on the possible violations involved when the CEO and the investment advisors are "very tight" and the investment advisors are pulling in six-figure fees!

Commenting on the last paragraph above - all individual stocks, eh?  How much does that cost as a percentage of the invested assets?  Wait until the lawyers suing all those colleges hear about this one!

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22 minutes ago, My 2 cents said:

Commenting on the 2nd paragraph above - wouldn't having the sponsor making all the investment decisions concerning the 401(k) assets be much riskier, from a fiduciary responsibility standpoint, than allowing the participants to direct the investments?  

Not really.  Participant direction comes with a minefield of requirements and disclosures.  Participant directed plans are an easy target for Schlichter and company because you can almost always find plausible issues with fund lineups, fund choices, share classes, disclosures that you need a PhD to navigate, failures to disclose , etc.

There is risk involved with trustee direction as well, but I actually think you have more risk in a participant directed plan.

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I would agree you have more operational risks in a Participant directed plan, but a Trustee directed plan seems like a ripe target on investment risks.  Self-dealing & excessive fee suits are a lot more common in the news that failure to distribute/disclose.   

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1 hour ago, TPAJake said:

I would agree you have more operational risks in a Participant directed plan, but a Trustee directed plan seems like a ripe target on investment risks.  Self-dealing & excessive fee suits are a lot more common in the news that failure to distribute/disclose.   

Why the assumption that self-dealing & excessive fees is a trustee directed plan issue?

Often, those types of claims arise because the investment options provided to the participants are proprietary funds with higher fees than other available alternatives.  Or that a fund menu is stacked with share classes paying higher fees or revenue sharing rather than low cost or no revenue sharing funds.  

The plans targeted tend to be large plans with many participants, and they are statistically unlikely to be trustee directed...

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All other things being equal, using an investment advisor who is tight with the CEO and who, for six figures per year, invests exclusively in individual stock shares, does not usually result in reasonable expense charges, even if one is lucky enough to get presentable rates of return almost as good as index funds.

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3 hours ago, RatherBeGolfing said:

There is risk involved with trustee direction as well, but I actually think you have more risk in a participant directed plan.

Amen!

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2 hours ago, RatherBeGolfing said:

Why the assumption that self-dealing & excessive fees is a trustee directed plan issue?

Often, those types of claims arise because the investment options provided to the participants are proprietary funds with higher fees than other available alternatives.  Or that a fund menu is stacked with share classes paying higher fees or revenue sharing rather than low cost or no revenue sharing funds.  

The plans targeted tend to be large plans with many participants, and they are statistically unlikely to be trustee directed...

I don't assume those are issues common to Trustee directed plans, quite the opposite usually, but if a case is presented, it seems like it would be difficult to defend the Trustee's investment selection in the face of losses--Luckily I have no personal experience with that!

It struck me in this case as the CEO keeping his buddies (or personal asset managers) on the Plan to gain some benefit on the personal side.  Not the traditional self-dealing scenario, but the name fits.  

As far as excessive fees, if they're running individual stocks & collecting six figures annually they better be topping the market by a large margin.  If their returns are comparable to other plans in their peer group, then a lot of questions start to arise about how appropriate this fee arrangement can be.  Sometimes perception is reality...

All that aside, I do think that more Plans should be Trustee directed because Participants are not known to be the smartest investors.  

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I don't see the monsters under the bed that others are seeing.  Assuming the investment advisors have a long term and successful track record, the fact that the CEO has gotten to know them well is what I would expect.  How could it be any other way?  Different managers have different methodologies and just because investments are primarily equity based doesn't mean that they don't employ sophisticated portfolio risk aversion techniques.  I just don't see the problem with the CEO holding his ground.

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The relationship between the CEO and advisor isn't prima facie evidence of a problem.   It could be a red flag. 

To become a problem there would have to be something else happening. 

For example decisions have to be for the exclusive benefit of the participants.  Back in the '90s I recall a number of banks made as a condition for the plan sponsor to get the loans the company needed they had to move 100% of their business to the bank.  So the bank got the company's checking account and since more banks did 401(k) work in their trust departments the 401(k) had to be moved.  Even if you could show the costs were about the same this raised exclusive benefit rules questions. 

In the end if the investment advisor is helping the company get funding or some other service besides the 401(k) plan and there is some other conditions upon this whole relationship then it would become a problem. 

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  • 3 years later...

I fail to understand why a company would want to take on the liability of having to answer to, or justify a "one-size fits all" asset allocation solution, regardless of the participant's age, risk tolerance, etc...as an option.  Allowing for participant direction seems to eliminate the venom more completely. Just in the same way that when I exchange my time and labor for an employer's wages, the employer's money then becomes "my" money.  The same is true as soon as an employer's contributions to a retirement plan become vested and owned by the participant... and realistically, even beforehand.  Why would a trustee/fiduciary knowingly take on the liability to have to potentially justify the fact that their 24 year olds were invested in the same manner as their 60 year olds?  Why take on the risk of having to answer to or justify their actions (or lack thereof), when allowing for participant direction seems to render this more of a moot point?  I've often heard from employers on these pooled and trustee directed plans, things like...."Well, you see...my employees don't"....Insert excuse here...."Know about investing"..."understand retirement plans"..."understand the market"...blah, blah, blah... Perhaps this is a scenario where possible good intentions were not fully thought through in light or risk assumed?  Was the advice to keep the status quo fully informed or perhaps potentially conflicted by those who would seek to protect their revenue? Let's hope that the employer's good intention approach prevailed in wanting to better support their employee's ability to succeed in retirement...If it was in fact a "lack of education" concern cited, then perhaps they should evaluate their expectations and needs for the level(s) of employee support provided as a component of how their plan is served and supported.  Crazy thought here, but perhaps they could hire an advisor or provider to address those "specific" concerns addressing "support".  Those same "my employees..." excuses justifying the one-size fits all approach to managing other's retirement assets, won't likely hold up in court if called to do so.  If called, best for them to have tons and tons of documentation on their decision making processes as a trustee/fiduciary (anyone with decision making authority) responsible and accountable for controlling other's vested assets.  In the trustee directed and or pooled asset plan scenario, plan sponsors need to realize that it's not the advisor's plan, assets, fiduciary duty or liability on the line.  Plan sponsors are liable for their decision making process on employees owned plan assets (vested or not) and are responsible (and perhaps personally liable) to answer to and perhaps defend what was, or was not done at any given point in time relative to any specific participant's best interest.

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1 hour ago, Who's money is it? said:

I fail to understand why a company would want to take on the liability of having to answer to, or justify a "one-size fits all" asset allocation solution, regardless of the participant's age, risk tolerance, etc...as an option.  Allowing for participant direction seems to eliminate the venom more completely. Just in the same way that when I exchange my time and labor for an employer's wages, the employer's money then becomes "my" money.  The same is true as soon as an employer's contributions to a retirement plan become vested and owned by the participant... and realistically, even beforehand.  Why would a trustee/fiduciary knowingly take on the liability to have to potentially justify the fact that their 24 year olds were invested in the same manner as their 60 year olds?  Why take on the risk of having to answer to or justify their actions (or lack thereof), when allowing for participant direction seems to render this more of a moot point?  I've often heard from employers on these pooled and trustee directed plans, things like...."Well, you see...my employees don't"....Insert excuse here...."Know about investing"..."understand retirement plans"..."understand the market"...blah, blah, blah... Perhaps this is a scenario where possible good intentions were not fully thought through in light or risk assumed?  Was the advice to keep the status quo fully informed or perhaps potentially conflicted by those who would seek to protect their revenue? Let's hope that the employer's good intention approach prevailed in wanting to better support their employee's ability to succeed in retirement...If it was in fact a "lack of education" concern cited, then perhaps they should evaluate their expectations and needs for the level(s) of employee support provided as a component of how their plan is served and supported.  Crazy thought here, but perhaps they could hire an advisor or provider to address those "specific" concerns addressing "support".  Those same "my employees..." excuses justifying the one-size fits all approach to managing other's retirement assets, won't likely hold up in court if called to do so.  If called, best for them to have tons and tons of documentation on their decision making processes as a trustee/fiduciary (anyone with decision making authority) responsible and accountable for controlling other's vested assets.  In the trustee directed and or pooled asset plan scenario, plan sponsors need to realize that it's not the advisor's plan, assets, fiduciary duty or liability on the line.  Plan sponsors are liable for their decision making process on employees owned plan assets (vested or not) and are responsible (and perhaps personally liable) to answer to and perhaps defend what was, or was not done at any given point in time relative to any specific participant's best interest.

Me thinks you are suffering from tunnel vision. I'd love to put you and @LarryStarr in a small room and see who walks out.

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10 hours ago, Who's money is it? said:

Those same "my employees..." excuses justifying the one-size fits all approach to managing other's retirement assets, won't likely hold up in court if called to do so.

Wait, you think a pooled plan that is properly diversified would have problems in court because it is pooled??

10 hours ago, Who's money is it? said:

Why take on the risk of having to answer to or justify their actions (or lack thereof), when allowing for participant direction seems to render this more of a moot point? 

Yep, participant direction takes away all the risk...

Im just gonna leave this here...

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When the 404(c) regulations finally came out long ago, Fred Reish came out and warned that, notwithstanding 404(c), he saw risk of liability in throwing unsophisticated participants to the dogs.  Fred loved being out on the forefront, and being a contrarian assured attention, but I am totally with him in spirit -- it is irresponsible to force unsophisiticated persons into a responsibility that ERISA requires of (essentially) a professional, with respect to one of the greatest sources of wealth they will ever have.  Employers have an interest in good performance so their employees have enough money to retire, rather than hang on too long (yes, a career is an antiquated notion).  After the regs came all the handwringing and complexity and Illusion of providing adequate investment information (but not required education) to deal with the realization that many participants did not want, or even feared, the responsibility of managing money, and were paralyzed.  Skip forward more years and know we have target-date funds and lifestyle funds and all sorts of things that essentially come back full circle with products that a participant effectively just chooses a money manager for them, and with very uncertain understanding of what they are doing.  And add features, if you will, that provides investment advice (either mechanically or personally) to participants, that is not free.  Experience has shown the weakness of the 404(c) approach.  Can you point to any evidence that shows a fiduciary who acts responsibly and in good faith (stealing is no fair) has anything to worry about?  Yeah, yeah, the young bucks will always complain about the old man's plan.  I am immune to that while conceding it is a valid point, but not as sharp as the young bucks think.

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