April 8, 2014 (PLANSPONSOR.com) – America’s Best 401k, a provider of 401(k) plan solutions for medium and small-sized businesses, has released an online tool that checks plan fees.
By entering in a company name, the fee checker will pull
plan information from the Department of Labor’s Form 5500 database and compare
its investment-related costs to industry averages. The checker is currently
using information from 2012 filings, but will access more current information
later this, when all Form 5500 paperwork for 2013 have been filed.
The free report produced by the tool is designed to allow
plan sponsors and plan participants to get a better understanding of the effect
of investment-related costs over time and to encourage business owners to
consider alternatives if appropriate.
According to Tom Zgainer, CEO of America’s
Best 401k, based in San Jose, California, research shows more than 30% of sponsors with assets
less than $25 million do not know the average expense ratios of the funds in their
plan. More than 50% of participants think they pay no investment-related fees,
or that their employer pays them, and more than 32% of participants say they do not
have the knowledge to understand the effect of fees over time.
“The report from the fee checker is designed to create a
starting point for a thorough, plan-specific analysis once we receive
additional information,” says Zgainer. “We recognize with the greater emphasis
on fee disclosure, plan sponsors are actively looking to lower investment-related
fees. However, there are still many plans paying egregious fees without fully
understanding the long-term results.”
More information about the online fee checker
can be found here.
In
daily life, people are more likely to visit restaurants and stores close to
home because they are familiar with the local area. But in doing so, they
deprive themselves of all the great places in other neighborhoods. Similarly, in
retirement portfolios, plan participants often over-allocate investments to
companies domiciled in their own country, thereby potentially missing out on
significant growth opportunities abroad, slowing their progress toward
retirement readiness.
Participants
generally tend to over-allocate assets to U.S.-based companies for three
reasons:
Habit:
Since the U.S. has historically been the world’s financial epicenter, participants
may be accustomed to investing in the U.S. and disinclined to responding to
changes occurring across the globe;
Knowledge:
Participants may generally understand the laws, currency, and accounting
requirements of their own country, but not those of a foreign country. Therefore,
participants are more comfortable investing in U.S.-based firms; and
History:
The best brands in the world have been, historically, U.S. brands, and the
familiarity participants have with these brands leads them to continue to
invest in those companies.
Foreign
Exposure May Increase Portfolio Diversification
Foreign
equities get a bad rap for being overly volatile. However, the MSCI EAFE and
the S&P 500 had comparable returns of 10.6% on an annualized basis over the
last 43 years! Therefore, plan participants who invested solely in their home
country would have been able to achieve a similar return with increased
diversification by allocating to foreign markets.
Additionally, participants may unknowingly
increase their risk by concentrating their investments into their home country.
For example, U.S. employees who work for a U.S.-based company may own their
employer’s stock in their retirement plans. If the stock’s value and the U.S.
broad market both decline, the participants’ losses could be magnified. Increased
diversification in a retirement portfolio may result in smoother returns over
the long-term.
Getting
the Most Out of Foreign Exposure
There
are several ways plan participants can increase their foreign exposure:
U.S.-based
multinationals offer some foreign exposure but not a lot. Since only 35% of revenue
from companies in the S&P 500 Index, which includes the largest U.S.
multinational companies, comes from overseas, participants are not maximizing their
potential opportunities in the global marketplace. Additionally, investing in
only U.S. multinationals limits exposure to some sectors such as oil and gas,
commercial banking, and auto manufacturing, given that the majority of global
market share in these sectors are based outside of the U.S.
Foreign-based
multinationals offer more foreign exposure since the majority of their sales, 55%,
come from countries outside of their home country, based on sales of companies
in the MSCI EAFE Index.
Foreign
local companies offer significant foreign exposure. These companies are often found
in emerging market countries and sell almost exclusively within their own
borders or neighboring countries. Only 28% of sales of companies in the MSCI Emerging
Markets Index are to foreign countries, confirming the vast majority of their
sales are done locally.
Boosting
foreign exposure in retirement portfolios can be an excellent way for plan
participants to increase diversification, take advantage of strong growth
opportunities, and help them reach their retirement goals.
Pedro Marcal is a senior
vice president, portfolio manager of the Alger International Growth Strategy,
and portfolio manager of the Alger Global Growth Strategy, for which he manages
the international developed portion of the portfolio. He joined Alger in
February 2013 and has 24 years of investment experience. Prior to joining
Alger, Pedro worked at Allianz Global Investors (formerly Nicholas-Applegate Capital
Management), where he focused on international equities including developed and
emerging markets products before moving on to manage global and developed
international equity portfolios. Pedro earned his BA from the University of
California at San Diego and his MBA from UCLA Anderson School of Management
NOTE: This feature
is to provide general information only, does not constitute legal
advice, and cannot be used or substituted for legal or tax advice.