A Better Way to do the 401(k)

A Better Way to do the 401(k)

Remember when 401(k) plans were supposed to be a benefit?

A benefit for employees, providing them with an outstanding opportunity to grow their retirement assets, tax-deferred, through their employer? And a benefit for the companies who offered those 401(k) plans, helping to distinguish them from other, less-generous companies in the market and keeping their employees happy and productive? Somewhere, somehow, the 401(k) plan lost its way. The market became dominated by huge financial services companies that only wanted to cram as many of their highfee, proprietary funds in the fund lineups as possible. Those exorbitant fund fees were used to hide everything from recordkeeping expenses to broker compensation, making it impossible for plan sponsors and plan participants to truly understand plan costs. Those same providers refused to take on the liability of fund selection and performance monitoring, instead forcing the executives of the companies who operated the plan to shoulder that liability. Meanwhile, participants were left to fend for themselves, forced to choose from a baffling menu of investment options to cobble together an investment portfolio that they alone were responsible for managing and maintaining. It doesn t have to be this way. The 401(k) plan can work. It can meet the needs of plan sponsor and plan participant alike, and do so in a costeffective, client-focused manner. 3

Welcome to Advisors Access : A better way to do the 401(k) 4

Advisors Access is the way the 401(k) should be a program that provides expert, conflict-free advice to plan sponsors and their participants, access to some of the most sought-after investment vehicles in the world, and total plan costs that are much lower than many of the programs offered by the large financial services providers. The Advisors Access program highlights include... Fee-only, independent Registered Investment Advisors who serve as both ERISA 3(21) and 3(38) advisors, taking the liability for investment selection and performance monitoring off of the plan sponsor. Expert, one-on-one advice to plan participants. Access to institutional investment vehicles that are not available on retail 401(k) platforms and normally require a minimum investment of $2 million per fund. Advisor Managed Portfolios that give participants the ability to turn the management of their 401(k) assets over to expert advisors. A comprehensive fund menu that is created by independent advisors using our Proprietary Fund Screening Process. The flexibility for participants who desire to manage their own portfolio to open a self-directed brokerage account and select from among thousands of mutual funds, stocks and bonds. Independent providers who are free from the conflicts of interest that plague traditional 401(k) plans. No hidden fees or fee-sharing arrangements between providers, giving you full transparency for all plan costs. 5

The Advisors Access Expert Team One of the main benefits of the Advisors Access 401(k) program is that we have assembled a team of expert service providers in every area. Unlike bundled programs in which one provider dabbles in a little of everything, the Advisors Access program brings an Expert Team concept to the management of your 401(k) plan. The Advisors Access Expert Team Members include: INVESTMENT ADVISORS Capital Directions, LLC As the national Portfolio Manager in the Advisors Access program, Capital Directions, LLC serves as the ERISA 3(38) Investment Manager for your plan. In this capacity Capital Directions assumes full discretion for the selection and monitoring of the investments offered to participants. This represents a significant shift of the fiduciary liability for investment selection and monitoring from the plan sponsor to a prudent expert. Founded in Atlanta in 1985, Capital Directions is a fee-only Registered Investment Advisor managing more than $750 million in assets for high-net-worth individuals, retirement plans, trusts, endowments and not-for-profit institutions. Capital Directions has twice been named one of the Best Managed Firms in the country in studies commissioned by Charles Schwab & Co., Inc. 6

RECORDKEEPER ALLIANCE One of the main advantages of the Advisors Access program is our nationwide network of independent recordkeeping firms. These experts in benefits consulting and administration are completely independent of any fund company, brokerage firm or insurance company; as such, their incentive to provide top-notch client service and professional counsel is paramount. Recordkeepers participating in the Advisors Access Recordkeeper Alliance include: CUSTODIAN Plan assets in the Advisors Access program are held in trust accounts at TD Ameritrade, Wilmington Trust, or Charles Schwab & Co., three of the largest and most respected custodians in the business. While the advisors to your plan are authorized to manage the plan s assets, the assets are always held in plan name at the custodian. That custodian works for you, not your advisor, providing you important peace-of-mind about the safety and security of your plan s assets. Schwab Retirement Plan Services, Inc., one of the largest and most respected recordkeeping firms in the United States. Schwab is one of the only large providers in the industry that does not require plan sponsors to use proprietary, high-fee funds in their investment menu. McCready & Keene, one of the nation s largest independent third party administration, recordkeeping and actuarial firms, dually headquartered in Virginia and Indiana. Administrative Services, LLC, one of the Southeast s premier benefits consulting firms and a subsidiary of the highly regarded accounting firm Kassouf & Co. in Birmingham, Ala. Our pledge of independence and objectivity: Neither the investment advisors nor the plan recordkeepers in the Advisors Access program receive any compensation from the investments offered through the plan. 7

The Advisors Access Investment Modules Not Just Choices SOLUTIONS. In the Advisors Access program, we don t just give you options we give you answers. We offer three distinctly different investment modules to your participants, ranging from a complete do-itfor-me solution to a self-directed brokerage window that lets a participant choose just about any investment they desire. Here is a look at the three different investment modules available in the Advisors Access program: MODULE A Participants can choose from one of the five Advisor Managed Portfolios constructed by the Advisors Access investment team. These all-or-nothing investment options span the risk spectrum from aggressive to conservative and are designed to give participants a single-choice investment option that frees them from the burden of managing their own portfolio. MODULE B Participants can choose from a menu of twelve mutual funds selected by the Advisors Access investment team. These funds were screened from the thousands available on the recordkeepers platforms to provide participants with a select group of funds that are low in cost and provide outstanding asset-class representation. For participants who wish to construct their own portfolios but want an objective advisor to do the research for them, these funds are excellent options. MOD U L E C Participants can build and manage their own portfolio through a self-directed brokerage window offered by the custodians in the Advisors Access program. With this option, participants can choose from literally thousands of mutual funds and individual securities, or retain the services of an independent investment advisor to manage their portfolio for them. NOTE: Plan sponsors can choose to offer all three modules, or can simplify the investment line-up by offering only Module A, or a combination of Module A and Module B. 8

The Solution to Analysis Paralysis : Advisor-Managed Portfolios International Large Stock 14% International Real Estate 5% Domestic Real Estate 5% International Small Stock 6% US Mid/Small Value Stock 16% Risk/Return Chart US Small Growth Stock 7% Intermediate Term Bond 0% Inflation Linked Bond 0% Short Term Bond 0% US Mid Growth Stock 7% US Large Growth Stock 20% US Large Value Stock 20% Most 401(k) providers tout all of the investment options available on their platform. But the reality is that participants are often overwhelmed by too much choice. Faced with mountains of data about dozens or even hundreds of funds, participants often develop analysis paralysis and end up making hasty, impulsive decisions about one of the most important things in their lives their retirement assets. We developed the Advisors Access investment lineup to overcome this problem. While the Advisors Access platform offers participants plenty of options, it also offers them something in short supply in the 401(k) market: HIGH ALL EQUITY PORTFOLIO GROWTH PORTFOLIO MODERATE GROWTH PORTFOLIO LOW HELP. Our Advisor Managed Portfolios give participants the ability to make a single choice about the investment of their 401(k) assets and still have the peace of mind that they are being invested in a well-diversified, expertly managed portfolio. CONSERVATIVE PORTFOLIO DEFENSIVE PORTFOLIO The Advisors Access Advisor Managed Portfolios give your participants the ability to turn the management of their 401(k) assets over to professional advisors. Unlike lifestyle and target-date funds, these portfolios are managed at the participant level by professional investment managers. Rebalancing and, if necessary, fund replacement are handled automatically for all participants. The participant s only responsibility is to select the portfolio that best suits his or her long-term risk and return needs. Statistics show that when participants are offered the option to select an advisor-managed portfolio or construct their own portfolio, more than 80% of participants opt for the advisor-managed portfolio. Clearly, when given the option to have an expert advisor manage their portfolio for them, the vast majority of participants jump at the chance. In the Advisors Access program, they have that chance. 9

The Advisors Access Proprietary Fund Screening Process In Advisors Access, we aren t limited to just a few fund families. As independent RIAs, we are free to choose from over 10,000 mutual funds when we create our fund lineup and construct our Advisor Managed Portfolios. So how do we sort through thousands of investment vehicles to find the best funds for our clients? The answer lies in the Advisors Access Proprietary Fund Screening Process, a 5-step methodology we developed to sort the good from the bad and find the investment vehicles we believe to be best-in-class. ALL FUNDS STEP 1 STEP 2 STEP 3 STEP 4 STEP 5 Advisors Access Funds Analyze Fund Structure Sort Active from Passive Funds Identify Available Asset Classes Research Fees and Trading Costs Secure Access to Institutional Funds 10

STEP 1: Analyze Fund Structure We use only open-end mutual funds in the Advisors Access program. We exclude all collective trusts, annuities, closed-end mutual funds and private money managers from consideration. While such investment vehicles may sometimes have merit for individual investors, it is often difficult, if not impossible, to obtain reliable third-party information on which securities those types of investment vehicles hold, what their fees and expenses are, and what their performance has been. This lack of verifiable information makes such investment vehicles unsuitable for consideration in a 401(k) plan. STEP 2: Sort Active from Passive Funds Studies show that more than 80% of actively managed funds fail to beat their market benchmark over five-year time periods. In contrast, passively managed funds seek to track a market benchmark or asset class at low cost and with great efficiency. In the Advisors Access program, we screen out high-fee, poor performing actively managed funds and focus our search process on passively managed funds. This isn t just our opinion; according to The Third Restatement of the Trusts, Current assessments of the degree of efficiency (of the capital markets) support the adoption of various forms of passive strategies by trustees the greater the trustees departure from one of the passive strategies, the greater is likely to be the burden of justification and also of continuous monitoring. STEP 3: Identify Available Asset Classes One of our main goals when selecting funds for the Advisors Access program is to be sure our investment vehicles cover the full spectrum of asset classes and investment styles stocks and bonds, foreign and domestic, large and small, growth and value, etc. We seek out fund companies that provide very precise exposure to our targeted asset classes, and do so with the least amount of tracking error and with very low fees. This helps us ensure that participants using our funds and portfolios get the asset-class exposure they are expecting. STEP 4: Research Fees, Sales Charges and Trading Costs When it comes to fund fees and expenses, the less you pay, the more you keep. That may seem like common sense, but it escapes the vast majority of the fund industry, where total funds costs often run between 2% and 3% annually. In the Advisors Access program, we place a premium on funds that keep fees well below industry average. In fact, many of the funds in our program cost five times less than the average retail actively managed stock fund! STEP 5: Secure Access To Institutional Funds Retail funds attract assets from small investors, who tend to trade frequently and drive up fund operating costs. In Advisors Access, we use predominantly institutional mutual funds, which are used by some of this country s largest retirement plans, foundations, endowments and not-for-profit groups. These funds incur much lower expenses and therefore often generate a higher net return than comparable retail funds that trade more often. From this rigorous screening process emerges some of the most effective, lowest cost investments available in the 401(k) marketplace, the majority of which come from Dimensional Fund Advisors (DFA) and Vanguard two of the most highly regarded fund companies in the world. In the Advisors Access program, we use these funds to craft a comprehensive fund lineup that participants can use to create their own portfolios, and we also use those same funds to construct the Advisor Managed Portfolios so popular with participants. 11

About DFA: The Best Big Fund Company You ve Never Heard of Institutional funds from firms like Dimensional Fund Advisors are used extensively in the Advisors Access 401(k) portfolio strategies. 12

The majority of the funds we use in the Advisors Access program come from Dimensional Fund Advisors (DFA). It is important for you to know that none of the service providers in the Advisors Access program receive any compensation from DFA for using their funds. We simply think DFA funds are among the best in the industry. DFA is one of the 15 largest mutual fund companies in the United States, managing more than $165 billion for individual and institutional investors. So why isn t DFA a household name? The simple answer is that DFA doesn t want to be a household name. DFA doesn t advertise and doesn t offer its funds through retail distribution channels. Unlike nearly all other fund companies, DFA doesn t take all-comers to its funds. In fact, the only entities in the country that have access to DFA funds are large institutional investors and independent advisors that DFA has personally vetted and approved. DFA s client list reads like a Who s-who of this country s premier corporations, public retirement plans and non-profit institutions, including: AT&T Inc. Boeing Corporation California Public Employees Retirement System Carnegie Mellon University Illinois Municipal Retirement Fund J. Paul Getty Trust Kellogg Company Merck PepsiCo, Inc. Packard Foundation Pfizer Inc. Sara Lee Corporation St. John s Hospital The reason for all this exclusivity is that DFA believes there is a right way to invest and a wrong way and the firm only wants to attract assets that are committed to its disciplined investment philosophy. That philosophy includes a belief in minimizing fees and trading, diversification, efficient markets and longterm investing. DFA adamantly avoids the kind of hot money from retail investors that flows in and out based on short-term market conditions and drives up expenses in the process. 13

Compare the advantages of the Advisors Access 401(k) program to those sold by brokers or offered direct by large fund companies and insurance companies: Advisors Access Broker-Sold Plan Direct-to-Provider Plan Fee-only Registered Investment Advisor YES NO NO Advisor assumes fiduciary liability for fund selection and performance monitoring YES NO NO Access to DFA funds YES NO NO Advisor-Managed Portfolios YES NO NO Expert team comprised of independent service providers YES NO NO Access to thousands of mutual funds YES SOME SOME Full fee transparency YES NO NO Direct advice to participants YES SOME SOME 14

The Advisors Access program has attracted more than $200 million in 401(k) plan assets since the beginning of 2008 and has gained the endorsement of some of this country s most prominent independent fiduciaries. Find out how Advisors Access can help both you and your participants enjoy a better 401(k) experience. Contact us at (760) 804-0910. Advisors Access. A Better Way to Do the 401(k)