Index Funds Advisors 401(k) Plan Solution

Transcription

1 Index Funds Advisors 401(k) Plan Solution Lower Costs for Employers, Better Options for Employees 2

2 Index Funds Advisors 401(k) Plan Solution Lower Costs for Employers, Better Options for Employees Corporate Office Index Funds Advisors, Inc Von Karman Ave. Suite 150 Irvine, CA Tel: (888) Local: (949) Fax: (949) IFA Copyright Index Funds Advisors, Inc. All rights reserved. Month-Day-Year 2

3 About Index Funds Advisors, Inc. Index Funds Advisors (IFA) is a fee-only independent financial advisor, registered with the U.S. Securities and Exchange Commission (SEC) and is headquartered in Irvine, California, with branch offices in Westlake Village, California, Madison, Wisconsin, Brenham, Texas and New York, New York, with regional representatives in Monrovia, California, and Naples, Florida. However, IFA s unique and impressive webbased investor education presence makes the company s global location ifa.com. IFA s clearly defined mission is to change the way the world invests replacing speculation with science. IFA s clients enjoy a passive investing strategy that eliminates the need for stock picking, manager picking or market timing. Instead, IFA implements the scientific findings of Modern Portfolio Theory, Nobel Prize-winning economists, 82 years of risk and return data and hundreds of academic and peer-reviewed studies. IFA does so because these important contributions to investing science have comprehensively revealed the superior returns that come from buying and holding a passively managed blend of riskappropriate and globally diversified index funds. Founded in 1999, IFA s assets under management for its 1500 unique clients and 3500 accounts are over $1 Billion as of December 31, IFA provides investment advice to high net worth individuals, foundations, 401(k) plans and endowments. In July 2007, Financial Advisor magazine named IFA the 3rd fastest-growing financial advisory firm in the country. In July 2008, Financial Advisor again declared IFA the 3rd fastest-growing financial advisory firm in its category. There are many advantages of Index Funds Advisors (IFA s) investment strategy for 401(k) plans. Index funds investing is widely regarded as the best way to invest retirement assets, so much so that the U.S. Government s Thrift and Savings Plan is composed solely of index funds and adheres to the same sort of rigorous academic data that is used to develop and monitor IFA s investment strategy. 3

4 Benefits of IFA as your 401(k) Partner There are major differences between the 401(k) Plan offering provided by IFA and the typical 401(k) plan common to the industry. 1. IFA s Fiduciary Responsibility IFA is an ERISA 3(38) Fiduciary. IFA will accept in writing 100% of the fiduciary liability to select, monitor, and replace investments in the plan. IFA removes this liability from the plan sponsor (typically the employer). 2. Simplicity IFA will guide participants to low-cost, globally diversified portfolios specific to their individual risk capacity. This method has been shown to increase participation, improve returns and lower fees. 3. Better Investments IFA only uses funds it determines are in participants best interests. These include low-cost, institutional, no-load mutual funds that pay no revenue sharing fees and adhere to the guidelines for prudent investing. 4. Total Transparency & Disclosure IFA will disclose in writing its fee and will also send quarterly notices detailing how its fee was calculated and charged. This practice enables for simple fee benchmarking and cost comparisons for plan sponsors. 5. A Qualified Team of Experts IFA s plans are unbundled. Each service provider demonstrates their worth for the fee they charge. IFA works with experts in each area, including Administration/Compliance, Custody, Recordkeeping, and Investments to provide superior service. 6. Direct Benefits for Plan Sponsors & Participants The value of an IFA 401(k) to plan sponsors and participants is enormous. In takeover plans, IFA can: Lower fees Increase participation Improve returns Let s Get Started... 4

5 Q: A: Q: A: Q: A: Q: A: IFA Lifts the Fiduciary Burden from Plan Sponsors What do all of these companies have in common? Wal-Mart, Lockheed Martin, General Dynamics, United Technologies Corporation, Bechtel Group, Caterpillar Inc., International Paper, and Honda Motor Corporation. They have all been recipients of lawsuits filed for breach of fiduciary duty in their retirement plans. The lawsuit filed against Wal-Mart, the nation s largest employer claims that the mega-retailer breached its fiduciary duties by allowing its 401(k) plan participants to be charged unreasonably expensive fees. However, concern looms large among the under $50 million plans which likely have far less fiduciary oversight and potentially much greater liability for plan fiduciaries. Do you know the extent of your liability? Plan sponsors are 100% liable for the investments in their plans. Honda learned this the hard way when it was sued by its participants, Honda asserted that Merrill Lynch was the fiduciary to the plan, but Merrill advised the court that it was not an ERISA fiduciary regarding the specific conduct alleged in the complaint. Merrill asserted that Honda was the sole plan fiduciary as it had exclusive authority to select the plan s investment options. Merrill made this assertion despite the presence of Merrill Lynch s proprietary funds among the options to plan participants. Did you know an ERISA 3(38) fiduciary will accept all responsibility for investment selection? IFA will sign onto plans as an ERISA 3(38) fiduciary, offloading this burden from plan sponsors and eliminating plan sponsors liability for investment selection, and monitoring. Plan sponsors can delegate these duties to a bank, registered investment advisor or insurance company. This offloading of such fiduciary duties from the shoulders of plan sponsor executives and their transfer onto the shoulders of such entities is significant and provides immense value to such executives, says W. Scott Simon, Morningstar columnist. Which is better? An ERISA 3(38) Fiduciary or your typical 401(k) Advisor? An ERISA 3(38) Fiduciary will acknowledge in writing they are a fiduciary with operational and administrative responsibilities and liabilities. As an ERISA 3(38) fiduciary will monitor your investments on an ongoing basis to ensure they are prudent. Your typical 401(k) Advisor will not perform either of these important functions. Plan sponsors are vulnerable to lawsuits as attorneys scour Form 5500s for breach of fiduciary responsibility. 5

6 IFA s Unbundled Team of Experts: Delivering Total Transparency IFA s industry-leading partners in 401(k) plan delivery have been selected for their outstanding service capabilities, competitive costs and shared commitment to excellence for both plan sponsor and plan participant. This unbundling of service providers allows for cost transparency and operational excellence. IFA receives no compensation from any of its unbundled partners. These fee-only providers are described in the pages that follow. They include: Investment Advisor Index Funds Advisors, Inc. (IFA). For plan sponsors, IFA acts as a 3(38) investment fiduciary, accepting liability and responsibility for the selection, monitoring and replacement of passively managed index funds. For plan sponsors and plan participants, IFA provides risk-appropriate asset allocation through the implementation of multiple risk-specific Model Portfolios which carry 82 years of historic risk and return data. IFA matches people with portfolios by carefully qualifying and quantifying five dimensions of an investor s Risk Capacity and matching it to five dimensions of a portfolio s risk exposure. This process facilitates investor-specific optimal returns, and mitigates the fiduciary burden of plan sponsors. Investments IFA has performed extensive research, and has concluded the best fund families for plan participants are Dimensional Fund Advisors (DFA) and funds from The Vanguard Group. Dimensional Fund Advisors provides institutional-style index funds which are not available to individual investors, while Vanguard Group funds offer very low-cost index funds vehicles. Third-Party Plan Administrator If deemed necessary, Qualified Benefits, Inc. provides all the tools and services to achieve your company s retirement goals through advanced plan design to facilitate maximum benefits and to keep your plan(s) in compliance with IRS and DOL regulations. Recordkeepers IFA partners with Aspire Financial or NextStepDC to fulfill the requirements of recordkeeper and plan administrator. IFA has determined that each company s fully transparent fee structure, along with myriad beneficial services, makes each company a superior industry choice for valuation, form filings, testing, and many other important services. Custodians To better serve its rapidly expanding 401(k) client base, IFA has the option of choosing from three industry-leading custodial partners: TD Ameritrade Trust Company, Charles Schwab Trust Company and Matrix Financial. Each company provides comprehensive brokerage and custody services. Each company s advanced technology platform, coupled with personal support from dedicated service teams, allow efficient and effective service to advance your plan s custodial needs. Ask your IFA Investment Advisor Representative which one is right for you and your plan s specific circumstances. 6

7 IFA s Benefits to Plan Sponsors: Fiduciary Protection The importance of maintaining a low-cost plan is fundamentally important to enhancing returns. This is why ERISA Code mandates that plan trustees benchmark fees for all aspects of the plan. Mandates for benchmarking also apply to mutual fund performance and fees relative to a peer group. Given the substantial liability in combination with the knowledge and information required to make informed choices, most plan sponsors enlist the help of an advisor. The typical advisor will suggest which investments a plan should contain and may provide participants education for making plan allocations. However, for a plan sponsor, this is insufficient. Most advisors are compensated via 12b-1 fees. As a result of this compensation scheme, advisors make sure their investment suggestions are nothing more than suggestions, leaving the liability for the ultimate decisions, and any negative outcomes, squarely on the shoulders of the plan sponsor. Most advisors will not sign on as a fiduciary to act in the plan s best interests because they may be acting in their own best interests, instead. The investment advice provisions of the recently enacted Pension Protection Act of 2006 relieve employers of liability associated with providing participants such advice as long as the advice is provided by a fiduciary advisor under an eligible investment advice arrangement. Facilitating this sort of arrangement is accomplished only through a written agreement which sets forth the investment advisor as an ERISA 3(38)-defined investment manager. In so agreeing, the advisor becomes an ERISA 405(d)(1) defined independent fiduciary. This arrangement permits the plan fiduciaries to delegate their personal responsibility for the selection and monitoring of a plan s menu of investment options to the advisor under ERISA section 3(38). The plan fiduciaries retain the responsibility (and liability) for selecting, monitoring and replacing (if necessary) the investment manager periodically to ensure that the manager is handling the plan s menu of investment options prudently. IFA is an ERISA 3(38) investment fiduciary who provides extensive benefits to plan sponsors and plan participants alike by: Establishing the plan s investment policy Identifying risk-appropriate asset allocation models and implementing them through index portfolios Prudently selecting, monitoring, removing and replacing 401(k) plan investment options Establishing each plan participant s individual Risk Capacity to educate and assist in the selection of a risk- appropriate portfolio Providing investment education materials to advance participant knowledge of investing Assembling and quarterbacking the 401(k) team including Custodian, Recordkeeper, and TPA and overseeing the administration of the plan By assuming these important fiduciary obligations, IFA significantly reduces the legwork and burden that fall upon the plan sponsor and substantially simplifies the duties regarding the plan. Choosing IFA ensures that 401(k) plans will be prudently executed from both administrative and investment perspectives, and that participants will benefit from investments that will set them on their best course for retirement. 7

8 IFA s Benefits to Plan Sponsors: Adherence to the Prudent Investor Rule IFA s index investing strategy is an ideal way for plan sponsors to fulfill the requirements set forth in the Prudent Investor Rule. Index investing enables plan sponsors to implement retirement portfolios with sufficient and appropriate risk exposure. This makes index investing the best and most prudent way to uphold the fiduciary standard and achieve participants goals for investing. This concept is even incorporated into legal guidelines under the American Law Institute s so-called Restatement of the Law, Trust, Prudent Investor Rule. The rule, published in 1992, was written as a guideline for the prudent management of trust assets and many states passed it into law. In California it passed into law in 1996 under the title The Uniform Prudent Investor Act. This rule points out the value of Modern Portfolio Theory. It essentially tells trustees that index funds are the prudent way to invest trust assets. The rule acts as a legal road map for estate planning attorneys, trustees of all types of trusts, and investment advisors. Five Principles of Prudence 1. Sound diversification is fundamental to risk management and is therefore ordinarily required of trustees. 2. Risk and return are so directly related that trustees have a duty to analyze and make conscious decisions concerning the levels of risk appropriate to the purposes, distribution requirements, and other circumstances of the trusts they administer. 3. Trustees have a duty to avoid fees, transaction costs and other expenses that are not justified by the needs and realistic objectives of the trust s investment program. 4. The fiduciary duty of impartiality requires a balancing of the elements of return between production of current income and the protection of purchasing power. 5. Trustees may have a duty as well as the authority to delegate as prudent investors would. Fiduciaries and investors are confronted with evidence that the application of expertise, investigation, and diligence in efforts to beat the market ordinarily promises little or no payoff, or even a negative payoff after expenses. American Law Institute s 1992 restatement of the Prudent Investor Rule 8

9 IFA s Benefits to Plan Sponsors: Prudent Benchmarking Process IFA s fee benchmarking reveals fee disparities that exist among mutual funds. Active managers, on average, charge more than twice the fees of passive managers. This is also true in the international fund universe. The Government Accountability office estimates that a one-percentage point increase in 401(k) fees borne by plan participants would cut a worker s savings 17% over 20 years. The Wall Street Journal, Small 401(k) Plans Often Pay Big Fees, August

10 IFA s Benefits to Participants: Low-Cost funds & higher expected returns IFA delivers a purely passive investment experience that is steeped in 82 years of historical data. This abundance of data enables IFA to make recommendations on investment portfolios which carry the highest probability of achieving the expected return for each IFA Index Portfolio. IFA recommends index funds exclusively, and for the following reasons: Reams of academic data reveal the excessive expense and wealth-eroding impact of actively managed funds. As fiduciaries, plan sponsors are duty-bound to act in the best interest of plan participants. Risk-appropriate and globally diversified index portfolios enable plan participants to: Invest to achieve an expected return commensurate with their individual risk capacity Avoid the costly, disappointing and deceptively expensive impact of active management Buy, hold and rebalance a low-cost and globally diversified asset allocation that is fully transparent In March 2010, the U.S. Department of Labor issued a proposal to mandate the exclusion of performance data from computer models which generate investment advice to plan participants. Doing so escalates the important issue of fees and their erosive impact on account values over time. With the average actively managed funds charging 1.5%, and the average index fund charging about 0.5%, index funds are the clear winner. An IFA 401(k) enables plan participants to optimize their retirement investing with a platform that includes: Low-cost, passively managed portfolios of institutional index funds Risk Capacity Analysis and risk-appropriate investment implementation Automatic Portfolio Rebalancing Easy-to-understand online statements Easily accessible and in-depth participant investment education Online video enrollment for easy, convenient and risk-appropriate participation Risk Capacity is a measurement of your ability to earn stock market returns. Mark T. Hebner, Index Funds: The 12-Step Program for Active Investors 10

11 IFA s Benefits to Participants: Markets Superior Returns Most 401(k) plans offer a wide variety of expensive actively managed funds. The inclusion of actively managed funds can lead participants to make poor fund selections that can increase volatility and dampen the performance compared to an index portfolio. Numerous academic studies conclude that actively managed funds offer no compelling reason for inclusion in an investment plan. These studies show that index funds most often outperform managed funds across all asset classes over time and that the markets returns are the superior returns. Plan sponsors selection and termination of active managers based on recent past performance has shown to detract from investment values when compared to what could be achieved by simply buying, holding and rebalancing low-cost, style-pure portfolios of market indexes. Why pay people to gamble with your money? William Sharpe, Nobel Prize Winner in Economics,

12 IFA s Benefits to Participants: Risk-Appropriate Model portfolios IFA s Index Portfolios employ the use of 15 unique IFA Indexes to accomplish the important goal of riskappropriate global diversification. Higher-risk Index Portfolios are comprised primarily of equities, while lower numbered Index Portfolios have higher percentage allocations to fixed income. When investors buy, hold and rebalance these Index Portfolios, they achieve global diversification and risk-appropriate allocations to as many as 17,000 companies in 40 different countries. These investments provide complete transparency and a costeffective, risk-appropriate way to invest for retirement. IFA Index Portfolio 90: Gold Aggressive: Suitable for investors who have at least 15 years before needing approximately 20% of their investments and are willing to accept a very high degree of volatility in exchange for extremely high portfolio growth potential. IFA Index Portfolio 70: Dark Teal Moderately Aggressive: Suitable for investors who have at least 12 years before needing approximately 20% of their investments and are willing to accept a higher degree of volatility in order to achieve higher portfolio growth potential. IFA Index Portfolio 50: Sea Green Moderate: Suitable for investors who have 8 years before needing approximately 20% of their investments and are willing to accept a moderate degree of volatility in order to achieve moderate portfolio growth. IFA Index Portfolio 30: Pale Blue Moderately Conservative: Suitable for investors who have 6 years before needing approximately 20% of their investments and are willing to accept a moderately conservative degree of risk to achieve portfolio growth with emphasis on capital preservation. IFA Index Portfolio 10: Light Yellow Conservative: Suitable for investors who have 4 years before needing approximately 20% of their investments and are comfortable with minimal risk to achieve incremental portfolio growth with an emphasis on capital preservation. Most investors, both institutional and individual, will find the best way to own common stocks is through an index fund that charges minimal fees. Those following this path are sure to beat the net results (after fees and expenses) delivered by the great majority of investment professionals. Warren Buffett, Berkshire Hathaway Chairman and legendary American investor, 1996 Shareholder Letter 12

13 IFA s Benefits to Participants: Employee Education IFA President, Mark Hebner s book, Index Funds: The 12-Step Program for Active Investors offers a detailed overview of index funds investing and how to avoid the pitfalls of active investing, providing investors with the educational tools to make smarter investment choices that will enhance their long-term financial outlook. Hebner s comprehensive book gives readers extensive insight into index funds, complemented with more than 250 original charts and 100 illustrative portraits. This comprehensive material will be available on your plan website, at ifa.com, and a hard-bound printed book is available at amazon.com. High praise for Mark Hebner s Index Funds: The 12-Step Program for Active Investors : Mark Hebner s magnificent book presents solid financial theory and practice wrapped in an elegant package. Harry Markowitz Ph.D., Nobel Laureate in Economics, Father of Modern Portfolio Theory...an incredibly handsome and wise book. We must be near a tipping point of passive over active. Perhaps your book will mark the moment. John C. Bogle, Founder and Past CEO of The Vanguard Group Hebner gives good advice presented in a very appealing manner. Congratulations on a very nice piece of work Burton G. Malkiel, Professor of Economics, Princeton University 13

14 IFA s Benefits to Participants: Smart Plan Advisor IFA provides each plan with VWise s state-of-the-art 401(k) information delivery system: Smart Plan Advisor. This online interactive 401(k) information, education and enrollment program is specifically designed to increase participation and improve the investment outcomes for all plan participants. Best of all, Smart Plan Advisor enables each plan participant to go at their own pace, in the privacy of their home or office, and carefully weigh and understand the investment options available to them. With Model Portfolio options designed to match an individual s risk capacity, plan participants will learn which Index Portfolio is right for them, as well as how much they need to save to ensure their brightest retirement future. Plan sponsors will benefit from the extensive information about the individual plan that is incorporated into the Smart Plan Advisor platform. Drawing information from the plan document, Smart Plan Advisor can answer many of the questions that participants may have about plan particulars. This added benefit can save hundreds of hours of human resources time spent answering the same questions again and again. Even better, eligible participants will feel more comfortable with the process, improving participation and savings rates. Key Benefits of SmartPlan: Higher enrollment Increased contribution levels Fewer on-site live meetings Improved financial education Reduced support costs Fulfillment of fiduciary duty Tracking of user actions Many participants have an appalling lack of understanding of basic principles of investing. Scott Burns, Financial Columnist, Dallas Morning News 14

15 Investments Dimensional Fund Advisors (DFA) is a respected leader in structuring investment portfolios for institutional accounts including corporations, pensions, profit sharing plans, charitable organizations, labor unions, and government entities. DFA s no-load mutual funds are not available to the public, retail brokers or most investment advisors. However, IFA is one of a select group of advisors approved to offer these institutional funds to your employees. Founded in 1981, DFA currently holds approximately $165 billion assets under management. DFA s funds are designed according to Nobel Prize winning research and are based on the principles of efficient markets, diversification, asset allocation, and the relationship between time, risk and return. DFA implements the many principles that make up Modern Portfolio Theory. Additionally, DFA works with and employs many highly respected academic financial economists who provide findings and strategies based on their ongoing empirical research. DFA s many benefits include: Higher expected returns through appropriate tilts toward crucial risk factors Minimal trading costs Low expense ratios Low turnover rates Asset class persistence Vanguard index funds provide low-cost funds that enable investors to cost-effectively purchase market indexes. Under the guidance of Vanguard Group Founder and President, John C. Bogle, Vanguard introduced the first index mutual fund for individual investors in Today, certain Vanguard funds enable investors to invest in risk-appropriate doses of specific indexes, allowing for minimal trading costs, lower expenses, and low turnover. Sufficient retirement income depends on a wise combination of years worked vs. years of retirement, the savings rate, and the rate of return. Scott Burns, Financial Columnist, Dallas Morning News 15

16 Administration & Recordkeeping QBI, Aspire Financial & Nextstepdc Compliance and Reporting: Compliance services are provided by experienced qualified plan and accounting professionals under the direct supervision of senior compliance management personnel. Our team of experts can assist with special needs for advanced plan design to maximize deferrals, as well as to facilitate the essential compliance and reporting requirements of all plans, including: Actual Deferral Percentage (ADP) Test (IRC 401(k)) Actual Contribution Percentage (ACP) Test (IRC 401(m)) Multiple Use Test (where applicable) Coverage Test (IRC 410(b)) Top Heavy Test (IRC 416) Maximum Deferral Limit Test (IRC 402(g)) Annual Additions Limitations (IRC 415) Preparation of signature-ready Form 5500 Preparation of plan-level reportable transactions Preparation of a reconciliation of items recorded in the 5500 IFA partners with independent providers for recordkeeping and administrative services for its 401(k) and other defined contribution plans. Through the use of leading-edge technology, these providers offer innovative and comprehensive retirement solutions for plan sponsors and plan participants. Our partners harbor independent business models which enable IFA to avoid funds which make use of 12b-1 fees. IFA s preferred team of recordkeepers provide access to institutional class index funds, offering an appealing choice for plan sponsors who seek low-cost and transparent investment options for the benefit of their plan participants. Our recordkeepers maintain partnerships with some of the world s leading software and IT services companies. These systems are responsible for the processing of more than 30 million retirement accounts. These partnerships enable plan sponsors to work with the very best the industry has to offer in terms of security, stability, compliance, functionality and content. 16

17 Custodians TD Ameritrade, Charles Schwab, & Matrix Financial TD Ameritrade Institutional is a leading provider of comprehensive brokerage and custody services. The company s advanced technology platform, coupled with personal support from its dedicated service teams, allows efficient and effective service. TD Ameritrade was listed by Forbes as one of America s best big companies. To better serve its rapidly expanding 401(k) client base, TD Ameritrade acquired Fiserv in With the inclusion of Fiserv Trust Company, TD Ameritrade Institutional also added significant growth to its 401(k) custody business. TD Ameritrade Institutional s acquisition of Fiserv increased the firm s institutional assets to more than $100 billion, and provided significant infrastructure to make TD Ameritrade a leading provider of 401(k) plan services relative to the role of custodian. Matrix Financial Solutions, Inc. (Matrix) is one of the nation s largest providers of products and services for third-party administrators (TPAs), financial advisers, banks, and wealth management professionals. The Denverbased company has combined trust and custody, trading, investments, settlement, and technology under one organization through its family of companies, which include Matrix Settlement & Clearance Services (MSCS); MSCS Financial Services, LLC; MG Advisory Services, LLC (MG Advisory); MG Trust Company, LLC; Optech Systems, Inc.; Matrix Communication Technologies, LLC; and Prima Capital. At the core of Matrix Financial Solutions business is MSCS, which provides clearing and settlement of mutual funds for its customers. Matrix s trust company, MG Trust, serves as custodian or directed trustee for more than 38, (k) plans. Through its recent acquisition of The 401(k) Company, Charles Schwab serves the retirement market by offering independent plan providers and fiduciaries industry-leading trust, custody and clearing services, custom investment solutions and cutting-edge technology. As an industry leader, Schwab is committed to providing the superior products and services to facilitate comprehensive retirement plan solutions so that plan sponsors can grow and succeed. Schwab is a trusted partner who can help fulfill business needs and expectations. As a leader in the industry, Schwab s goal is to set the standard for operational excellence, stability and fee transparency. Plan sponsors benefit from Schwab s commitment to: Unbundled flexibility to work with any provider Alternative product solutions for customized plans Shareholder servicing payments and reporting Dedicated conversion and implementation team with experience in block conversions Participant level benchmarking reports Legislative and regulatory updates to help you remain compliant with industry standards 17

18 Corporate Office Von Karman Ave. Suite 150 Irvine, CA Toll Free: Local: Fax: