When business owners set up 401(k) retirement programs to offer their employees, they typically turn to a mutual fund company or broker for advice and administration. These days, they may be better off talking to a banker.
The 401(k) benefit landscape is changing as ongoing regulatory investigations focus attention on fiduciary responsibility, full disclosure and open-architecture plans. Banks acting as investment advisers are in a unique position to advise on a far broader range of possible investment options, and to help business owners decide which of those options are likely to be most beneficial to their companies.
Today’s far-sighted banks are already partnering with retirement service providers to offer 401(k) benefit plans that allow companies to select offerings from among as many as 1,800 mutual funds without being tied to a particular fund family.
In addition, the banks monitor each fund’s performance and notify employers if a previously solid investment is wavering. As qualified financial advisers, bankers also can suggest appropriate alternatives from among top-tier options.
While it may seem to business owners that brokerage firms and mutual fund companies offer virtually the same plans and services, there are some significant differences that are important to note.
One difference is the mutual fund options that are available. Traditional 401(k) benefit plans have been geared toward specific mutual fund families and insurance companies, which put together menus that include large-cap, international, small-cap and other funds from within their own portfolios. Although such companies are beginning to include limited outside offerings, their plans remain weighted in favor of their own products.
Not only does that eliminate most of the thousands of mutual funds now on the market from a company’s plan, it also requires that the mutual fund company be equally adept at managing every fund in its portfolio. Some companies may be very good at managing large-cap funds; others are excellent bond managers and still others are best with small-cap funds, but they rarely do everything equally well.
With traditional 401(k) plans, employees may feel they have no choice but to accept mediocrity. With open-architecture plans through banks, they can select from more top-performing funds.
Some banks have no association with particular mutual funds and can suggest those that are likely to provide the best risk-adjusted returns without regard to who offers them. That means participants can be more confident that their investments will be performing as well after 10 years as they did during the first year.
Another difference is in fee disclosure. Mutual fund companies usually charge business owners nominal record-keeping fees, relying on expense ratios embedded in the plans to create their profit margins.
The expense ratios vary according to the size of the plan, meaning companies with fewer than 100 employees are likely to be put in a share class that has higher expense ratios than those for large firms. And, while plan assets grow, fund expenses remain constant.
Open-architecture plans with full disclosure normally have price breaks based on the asset size of the plans. As plan assets grow, plan expenses as a percent of assets decline.
Good bank adviser-based 401(k) plans let employers know up-front what fees are being charged. Employers may have the option of selecting certain funds partly on the basis of the level of revenue sharing (which reduces plan costs) that accompanies them, but in any event they know all the costs involved and can work to manage those costs effectively.
And, while many employers still view changing mutual fund providers as an enormous undertaking, advances in technology and banks’ expertise have streamlined the process so that it is relatively invisible both to employers and employees.
Taking everything into account, employers may well decide the best course is to consult their bank when selecting a 401(k) provider.
Jim Hrabak is vice president and portfolio manager and John Power is vice president of client relations in the Asset Management and Trust Group at MB Financial Bank. Reach Hrabak at (847) 653-2132 or firstname.lastname@example.org. Reach Power at (847) 653-2140 or email@example.com.