Choose Your Company's 401(k) Plan Carefully

Devon Porpora, Senior Managing Director and Portfolio Manager at First Republic Investment Management

October 23, 2014

Devon Porpora is a Senior Managing Director and Portfolio Manager at First Republic Investment Management. He joined First Republic Investment Management in 1999 as a Technology Analyst before transitioning to his current role. Before joining First Republic, Mr. Porpora worked as a Floor Trader on the New York Stock Exchange. His career in investment banking began in Hong Kong. He has been a guest on CNBC Europe and CNN Asia.

Protecting Clients and Country

Three things to consider when selecting a retirement plan for your employees.

The United States is facing a retirement crisis. The average American does a poor job of investing for retirement,1 and a large share of the fault lies with employers that offer their workers subpar retirement plans. These plans come with high fees, limited investment selection and minimal financial education. 

Even the most responsible investors can be sidetracked by a substandard 401(k) plan chosen by their employer. The hard truth is that many Americans are going to have to work longer because their hard-earned dollars are being eaten by high fees and poor performance of their employer’s retirement plan.

It’s clear what needs to be done to solve this problem. Employers must take matters into their own hands by selecting a 401(k) plan that offers their employees the investments and services that help them take better control of their financial futures. Here are three key aspects an organization should evaluate when selecting a 401(k) plan provider:

1. Design flexibility

A plan’s design can be one of the major detractors from long-term performance. Traditionally, most 401(k) plans have been “bundled,” meaning one vendor provides all the investment, recordkeeping and financial education services. All investments in a bundled plan are generally from the same company or family of mutual funds. That can greatly hurt a 401(k) plan’s performance, as recent Morningstar data shows that the 27 highest-rated funds are spread across 15 different fund families.2 In other words, a bundled plan greatly limits an employer’s ability to select the best-performing funds.  A growing number of today’s 401(k) providers offer unbundled plans, which give an employer and their retirement plan advisors maximum control and the ability to cherry-pick the best service providers and investment options. Increasing flexibility and choice leads to better performance.

2. Fee structure

Fees eat directly into investors’ returns. That is why it is so important to make sure costs are transparent and minimal. Many fees, such as sales commissions, are buried within the mutual fund’s annual expenses. It’s still not that unusual, for example, to see 401(k) plans with fees in the range of 3% per year. Organizations should make sure their 401(k) provider’s fees and those charged by each fund company or other investment firm are transparent and easy to justify.

3. Employee education

Strong participant education is one of the most important attributes of a successful plan. It’s become abundantly clear that today’s 401(k)-eligible employees need more investing education and better financial-planning tools related to their savings plan. Organizations should consider what types of educational services a 401(k) plan provider offers its participants. Providing employees with one-on-one financial-planning meetings with a professional, for example, can make them feel more confident in their investing and help ensure they build a well-diversified portfolio that's suited to their goals and risk tolerance.

The differences between an effective 401(k) plan and a poor-performing one are enormous—and significantly affect working Americans’ ability to save for retirement.  Organizations have more 401(k) plan options today than ever before. There is no excuse to be paying high fees or offering investment choices from a single fund family. By doing some comparative research and learning more about a provider’s services, investment options and fees, organizations can help their employees do a better job of saving for retirement.

1 Employee Benefit Research Institute, 2013 Retirement Confidence Survey
2 Morningstar Inc., Morningstar Medalists

First Republic Private Wealth Management encompasses First Republic Investment Management, Inc. (“FRIM”), an SEC-registered investment advisor, First Republic Securities Company, LLC (“FRSC”), Member FINRA/SIPC, First Republic Trust Company (“FRTC”) and First Republic Trust Company of Delaware LLC (“FRTC-DE”).  FRIM, FRSC, and FRTC-DE are wholly owned subsidiaries of First Republic Bank.  FRTC is a division of First Republic Bank.  Investment advisory services are provided through FRIM.  Securities brokerage services are provided through FRSC.  Trust and fiduciary services are provided through FRTC and FRTC-DE. Insurance agency services are provided through First Republic Securities Company, LLC, Member FINRA/SIPC, DBA Grand Eagle Insurance Services, LLC, CA Insurance License # 0I13184. This document is for information purposes only and is not intended as an offer or solicitation, or as the basis for any contract to purchase or sell any security, or other instrument, or to enter into or arrange any type of transaction as a consequence of any information contained herein. All analyses and projections depicted herein are for illustration only, and are not intended to be representations of performance or expected results. The results achieved by individual clients will vary and will depend on a number of factors including prevailing dividend yields, market liquidity, interest rate levels, market volatilities, and the client's expressed return and risk parameters at the time the service is initiated and during the term. Past performance is not a guarantee of future results. Investors should seek financial advice regarding the appropriateness of investing in any securities, other investment or investment strategies discussed or recommended in this report and should understand that statements regarding future prospects may not be realized. Although information in this document has been obtained from sources believed to be reliable, we do not guarantee its accuracy, completeness or fairness, and it should not be relied upon as such.  This document may not be reproduced or circulated without our written authority. The investment services and products mentioned in this document may often have tax consequences; therefore, it is important to bear in mind that FRIM does not provide tax advice. The levels and bases of taxation can change. Investors' tax affairs are their own responsibility and investors should consult their own attorneys or other tax advisors in order to understand the tax consequences of any products and services mentioned in this document. Investment and insurance products and services are not deposits of, or guaranteed by, any bank, are not insured by the Federal Deposit Insurance Corporation, the Federal Reserve Board, or any other government agency, entity or person and are subject to investment risks including the possible loss of principal.