Pub. 17 2018-2019 Issue 1

N E W J E R S E Y C O A L I T I O N O F A U T O M O T I V E R E T A I L E R S I S S U E N O . 2 , 2 0 1 8 36 new jersey auto retailer The Four “F” Words of 401(k)s: Part One – Funds This is Part One of a three-part series on effectively managing your company’s 401(k) program. BY KEVIN ELLMAN AND PAUL MILLER Everything you need to know about managing a 401(k) plan can be summed up with the four “F Words:” Funds, Fees, Fiduciary Responsibility and Fines. The following article will focus on funding, but company’s must take care of the first three if you want to avoid the fourth- FINES! According to Mass Mutual Financial Group, 72% of the 401(k) plans audited by the Department of Labor in 2015 were fined an average of $700,000 per audit. That’s $1.5 Billion in fines! The plan sponsor or trustee of any compa- ny’s 401(k) program is held to a strict fidu- ciary standard. Specifically, a company’s fiduciary is responsible to its employees not only for running a program that facilitates their ability to save for retirement, but follows all fiduciary guidelines. Follow- ing proper guidelines protects a company from fines and potential lawsuits from employees. Active vs. Passive FundManagement Common practice in most 401(k) programs is for the fiduciary to offer employees a se- lection of 20 to 30 actively managed mutual funds. If managed properly, the fiduciary has to take the time to properly rate each fund, at least once a year, and replace the underperformers with “better” funds. We believe this is a waste of time and mon- ey, especially in light of the fact that Dow Jones Indices Data as of 12/31/16 revealed that during the last five, ten and fifteen-year periods, over 85% of actively managed, U.S. Stock mutual funds, failed to meet or beat their benchmarks. Index funds can generally cost .07% per year, while the cost of actively managed mutual funds can be as high as 1.3 to 1.5%! Why should a company pay so much more for these funds, that history has shown will most likely fail to match the performance of the index funds, 85% of the time? (Source: Dow Jones Indices Data as of 12/31/16) More important, this extra cost is borne by the employees. Employ- ees could make the case that a company’s plan encouraged them to over-pay for an underperforming fund. They may have a basis for challenging the lack of fiduciary supervision. Dealerships should consider offering a full suite of passively managed index funds. If a company wants to offer a selection of both actively and passively managed funds, then it is essential the company follows fiduciary