401(k) Plans
MAC acts as an Advisor on 401k plans, also known as Defined Contribution Plans, through a variety of brokers including Fidelity Investments, America’s largest 401k provider. We provide qualified retirement plan solutions to companies in Austin, Dallas and Houston, TX.
We are very passionate about the 401k marketplace because we feel that 401k’s are one of the most effective means of funding a secure retirement, however, they are often loaded down with unnecessary expenses and offer poor investment options. As an independent, fee-only investment advisor, we provide open-architecture 401k retirement plan solutions that minimize many of the excessive costs of offering a qualified retirement plan to your employees, while providing best of breed investment options to plan participants.
This webpage is divided into three Sections.
Section 1: 401k Performance Report
Section 2: 401k Checklist
Section 3: 401k Solutions provided by The MAC
The following is our model portfolio’s performance on a Year-to-Date basis. If you elected not to participate in our model portfolio, please consult your statements or your TPA’s website for individual fund performance.
| DATE | |
| 12/31/2007 | |
| 06/30/2008 |
401(k) Performance Reporting Disclosure Statements
Portfolio returns are gross returns and do not reflect any non-fund expenses including but not limited to TPA fees, brokerage commissions and Adviser fees. These fees will be in the range of 1-2% annually. A participant’s realized return will be the reported return less these fees. Please check your company’s Adviser Agreement for fee schedule. Furthermore, actual realized returns will vary depending on money flows in and out of the master account.
For additional disclosures regarding our performance reporting, please visit our Disclaimer, Performance Reporting Disclosure and Copyright Statements .
Click here for an explanation on how we calculate our 401(k) Performance.
The following are some critical issues that a company should consider before deciding on a 401k plan:
- Has the plan’s advisor signed or willing to sign a statement of fiduciary responsibility to the plan’s participants?
- Are the investment choices offered on an open or closed-architecture platform?
- Is the plan advisor a fee-only advisor, a fee-based advisor or a broker?
- Are all the plan’s fees, commissions and expenses disclosed? Are there any soft dollar arrangements?
- Does the plan have any sort of penalty for terminating it?
- Is the investment advisor – the person(s) deciding which investments will be offered - independent of the plan provider?
1. Is the plan advisor signed on or willing to sign on as fiduciary to the plan?
How do I know?
If you have a separate contract signed with the advisor, it should state whether he has signed on as a fiduciary. As a general rule, brokers will not or cannot sign on as a fiduciary where as a Registered Investment Advisor (RIA) will typically assume this role.
Why is this important?
Even though you may not know it, the employer or business owner(s) has a fiduciary responsibility to the participants of the company’s 401k plan. In other words, the business owner is required to run a retirement plan in the best interest of his or her employees. Often, the business owner is not only unaware of the fiduciary responsibility that he or she has inherited, but they stand alone as the only fiduciary for the plan. The primary means of mitigating the owner’s responsibility to the plan’s participants is to have an advisor sign on as a fiduciary. (It is not possible to eliminate the owner’s liability.)
2. Are the investment choices offered on an open or closed-architecture platform?
How do I know?
There are several ways to easily identify if your plan’s platform is of the closed variety (Chances are, your plan is on a closed architecture platform as nearly 90% of the plans in place are.) Here are a few of the easier ways to tell.
- If your plan is offered through an Insurance Company (i.e. John Hancock, Principal Financial, The Hartford, ect) or a mutual fund family (American Funds, ect), then you definitely have a closed architecture plan.
- If the plan’s fund options are limited to a small group of funds (10 – 30 funds), you most likely have a closed architecture plan.
- If your plan contains B, C, T or R fund share classes, then you have a closed architecture plan. (A simple trick is to look at the fourth letter of the ticker symbol for your funds. The fourth letter typically, but not always, designates the class of the fund. If the fourth letter is consistent, then it’s fairly safe to assume that is the share class you’re buying into. As an example, ABCRX would be an R-share class fund.)
An open-architecture plan will offer the entire universe of funds that maintain a selling agreement with the plan’s custodian. (The TPA may only offer a select group of funds at any given time in order to keep costs down, but typically the entire universe of funds is available to be added to the platform.) Furthermore, open-architecture 401k plans typically offer a brokerage account option, where participants can establish an account similar to a traditional brokerage account enabling the participant to buy individual securities including ETF’s, stocks, bonds, ect.
Why is this important?
Since our firm’s primary role is to provide Asset Management services, we maintain that utilizing an open-architecture platform for our plans is the single most significant benefit we can provide. There are two crucial advantages in using an open-architecture platform.
First, we can provide funds that are in-line with our investment management strategy which often times diverges from that of conventional financial advisors. We can provide the following types of mutual funds via an open-architecture platform that are typically not found in traditional 401k’s.
- Sector specific funds (i.e. Natural Gas, Unhedged Foreign Bond, ect.)
- Commodity Funds
- Inverse or Bear Market Funds
- No-load Boutique Mutual Funds
- Country and Region Specific Funds (i.e. China, Brazil, Eastern Europe)
- Stable Value Fund
- Low-cost Index funds
Second, we can offer any share class available including no-load, low-cost index funds. In a closed-architecture platform, funds pay the provider a fee for being included in the plan, which in turn compensates the financial advisor for selling the plan. This fee is often hidden and not seen by the participants.
I have found that funds that are used only in 401k plans often underperform their no-load or A-share class counterparts. The fees paid to the provider are obviously one of the underlying reasons why these funds underperform but I am convinced there are other reasons as well.
Since closed-architecture plans limit their fund offerings, there is limited competition for plan assets. Typically, you’ll only have one fund in a specific sector or market cap. Therefore, the fund’s investment management team is less concerned with the performance on their 401k funds (R-shares or Variable portfolios) then they are with brokerage account funds (no-load or A-share class funds). There are all sorts of tricks that investment managers can play such as front-running that will typically lead to one fund outperforming another. Open-architecture plans typically include either no-load funds or A-share class funds bought at NAV (Net Asset Value). These funds often carry lower 12b-1 fees and any up-front commissions are waived.
3. Is the plan advisor a fee-only investment advisor, a fee-based financial advisor or a stock broker?
How do I know?
If the plan’s advisor is a fee-based financial advisor or stock broker, he will be required to have the name of his broker-dealer on his card. It will say something like “Securities, products and services are offered through…” (If you don’t have a card handy, the same verbiage can be found at the bottom of each page of their website.)
A fee-only investment advisor will be registered as an Investment Advisor with a specific state or with the SEC. A fee-only advisor will have either Registered Investment Advisor or Investment Advisor Representative on his or her card. (We’re registered with the State of Texas meaning we can only conduct business in the State of Texas – but why would we want to do business anywhere else?)
Why is this important?
There are two significant reasons why it’s beneficial to use a fee-only investment advisor to oversee your company’s 401k plan.
- Since a fee-only advisor is prohibited from being compensated in any means other than client fees, the advisor can instruct the TPA to recoup 12b-1 fees paid on the plan’s assets and use them to offset the administration costs of the plan. This lowers the out-of-pocket expense to the employer saving the business owners money.
- The other significant benefit to doing business with a fee-only investment advisor relates to conflicts of interest. Theoretically, a fee-only advisor has minimal conflicts of interest. If your plan’s advisor is “fee-based” or a traditional broker, he is being paid by someone other than the person who is benefiting from his service. Therefore, this creates an inherent conflict of interest.
4. Are all the plan’s fees, commissions and expenses disclosed? Are there any soft dollar arrangements?
How do I know?
You typically cannot unless you’re willing to pour over pages and pages of contracts and prospectuses (fun, fun!). The most efficient means is to ask your provider or advisor and hope they’re being straight with you. Also, you can call our office and we can review your plan documents to determine any sort of soft-dollar arrangements. (We know where to look.)
Why is this important?
A reoccurring theme we hear from business owners is their frustration in trying to calculate the actual 401k costs that the company and its employees are paying for their plan. As a fee-only advisor, all fees are disclosed. There are no wrap fees or hidden expenses. Typically, the fees for our 401k solutions consist of total fund management expenses, TPA fees and advisor fees.
5. Does the plan have any sort of penalty for terminating it?
How do I know?
If you’re the business owner, you’ll have to sign an acknowledgement form with the insurance company or 401k provider stating you understand there is a surrender charge or early termination fee on the plan. You can also call your provider and they’ll have to disclose both the nature and the schedule for any termination fees.
Why is this important?
401k plans provided by Insurance companies, such as The Principal, Nationwide Financial, John Hancock and The Hartford are famous (or infamous – depending on your point of view) for offering plans that have minimal start-up and administration fees but then lock you into the plan for several years by applying a surrender charge penalty for terminating the plan. This provides them the opportunity to recoup start-up costs by charging excessively high fees on plan assets.
If you’re the business owner, chances are that you’re the biggest contributor to the plan, so you’ll be the one who takes the biggest hit due to excessive fees and surrender charges. Historically, small businesses had limited options when they wished to start-up a 401k and insurance companies provided these businesses a simple and viable option. But now there are several TPA’s that provide administration on a start-up 401k for a reasonably low fee. It may require a bit more up-front, but it will be far less expensive in the long-run.
6. Is the advisor providing investment management for the plan – the person(s) deciding which investments will be offered - independent of the plan provider
How do I know?
If you have a separate contract with the advisor on the plan, then he or she is more than likely independent from the plan provider.
Why is this important?
If the plan advisor is not independent, then there is a natural conflict of interest. While you aren’t paying for the advisor directly, he or she is being paid by someone – someone who’s #1 priority is most likely not the plan’s participants.
To discuss your company’s plan or any of these issues, please Contact Our Office.
The MAC is Registered as an Investment Advisor with the State of Texas. Our primary office is in Dallas, TX and we provide 401k plans to clients throughout the State of Texas including Austin and Houston.
The MAC acts an advisor to 401k Plans providing the following services to our 401k clients:
- Conduct a thorough needs assessment to determine what type of plan will best serve the client’s needs.
- Research and select a custodian for the plan’s assets
- Research and select a Third Party Administrator (TPA) to administer the plan. The TPA will perform all the necessary administrative duties related to executing a plan, such as daily valuation of participants accounts, executing trades, preparing the company’s 5500 tax form along with completing compliance testing requirements.
- Provide asset management for the plan including mutual fund selection. We use a combination of low-cost index funds (typically less than 17bps) and actively managed funds that we feel will provide participants with above average risk-adjusted returns.
- Offer an actively managed portfolio option for plan participants. The MAC’s 401k Portfolio is designed to reflect the same investment themes that direct our individually managed accounts. (Participants may choose between the MAC’s Portfolio or they may choose to self-direct their investment selection.)
- Conduct enrollment meetings and provide educational materials to improve participation rates.
- Serve in the official role of a 401k advisor to the company’s plan by signing a statement of fiduciary responsibility to the plan’s participants.
- Provide retirement planning services and personal money management advice to 401k participants.
To discuss your company’s 401k plan or to submit a request for proposa, please Contact Our Office.
Start-up 401k Plans
Safe-Harbor 401k Plans
Roth 401k Plans
Profit Sharing Plans
New Comparability Plans / Benefit based Profit Sharing
Individual 401k
Yes, we do advise clients on Start-up 401k plans. Historically, small to medium sized companies (less than 500 employees) had very few options when initiating a retirement savings benefit for their employees. With the advent of open-architecture plans and low-cost administrative providers, options for smaller companies have improved dramatically.
Our initial step will be to complete a needs assessment to determine which kind of plan is best suited to fit your company’s needs. During this process we’ll do a cost-benefit analysis and comparison.
The Safe-harbor provision was established to help small businesses implement 401k plans while keeping administration and testing requirements to a minimum. To qualify for the Safe-harbor exemption, a plan must meet certain pre-defined criteria. This criteria varies depending on the size of the plan but basically involves the employer making certain minimum matching requirements.
We do offer a Roth 401k option as part of our plans. While we feel that this option is beneficial in some scenarios but we do not recommend adding a Roth option to a plan unless there is a compelling reason to do so.
The quick run-down on Roth 401k’s is this. Employee contributions are after-tax dollars and distributions are tax-free assuming all the necessary conditions are met. However, the Employer match and profit-sharing contributions are still pre-tax and all distributions will be taxed when they are paid to the beneficiary of the account. (Participants can defer taxes on distributions by transferring the assets directly into a Rollover IRA account.)
There has been a lot of buzz surrounding the new Roth option on 401k’s but we are generally not in favor of adding this option unless there is a compelling reason to do so. We’ve found that adding additional options to a company’s plan only serves to confuse participants and results in lower participation rates. If you have a young workforce or several highly compensated individuals who are maxing out their contribution allowance, then a Roth option may be a good idea for your company.
Often times, a company will include a profit-sharing bonus or plan for its employees as part of their 401k retirement plan. This accomplishes two objectives. First, if provides employees a key incentive while allowing the owners to receive company profits on a pre-tax and tax-deferred basis.
Second, contributions made to a pre-tax profit-sharing plan may improve the ratios for discrimination testing so business owners and highly compensated individuals can contribute more to their 401k accounts.
A few years back, the IRS approved a new method of testing profit-sharing contributions based on a benefits basis rather than on a dollar contribution basis. This new calculation method basically serves to combine the benefits of an age-weighted defined benefit plan with the flexibility of a defined contribution plan.
In specific instances, a New Comparability Profit Sharing plan allows business owners to make far larger contributions to their own qualified retirement accounts while providing only marginally higher contributions for their employees. Law Firms, Medical practices, CPA firms and Architecture firms are just some of the examples of companies that typically could benefit from this type of plan. We also provide defined benefit plans for small businesses which may allow for an even larger pre-tax contribution. You can learn more by clicking here.
An individual 401k, which is sometimes referred to as a Solo 401k, is a qualified retirement savings vehicle for self-employed persons without any employees other than a spouse. Often times, it is a toss up between whether a self-employed person should utilize a SEP-IRA or a Solo 401k. The primary reason for implementing a solo 401k versus a SEP-IRA is that in some circumstances, a solo 401k will allow you to defer additional income.
We offer a unique Individual 401k solution through Fidelity Investments. Our solution is unique because it utilizes a brokerage account allowing you to invest in individual equities, bonds, funds, ect. (Most Solo 401k’s are provided by a mutual fund family and only their funds are available. AIM funds is one of the fund families that offers a solo 401k.) And the best part about our solution is that Fidelity doesn’t charge anything to administer the plan. The only fee you’ll pay is our asset management fee which is based on a percentage of assets in the plan.
To discuss the various 401k solutions we provide or to make a request for proposal, please Contact Our Office.
401(k) Portfolio Performance Reporting Calculation
Total Portfolio Returns are calculated by multiplying the price returns (see next) of a particular fund or security by percentage of the portfolio allocated to the fund/security. For example, if a fund originally made up 25% of the portfolio and its YTD return is 10%, then it would contribute 2.5% to the total return of the portfolio.
Price Returns for individual positions are calculated by taking the difference in current price (P2) less the purchase price/previous year-end price, which ever is applicable, (P1) plus dividends paid (D) divided by the purchase/previous year-end price – (P2 + D – P1)/P1.
Compounding: From time to time, the adviser will change the allocation of the funds in the portfolio. In order to account for the compounding of YTD gains in the account, the following calculation will be made. The YTD gains for the portfolio plus a factor of one will be multiplied to the new current allocation. For example, assume that the portfolio is up 10% when an allocation change is made and 25% of the new allocation consists of Fund ABCDX. Any gains or losses for fund ABCDX will be multiplied by 27.5% to calculate the fund’s contribution to YTD gains.
