U.S. equity markets tumbled over the third quarter, posting a negative 15 percent return for the broad U.S. equity market (DJW 5000 Index). This was one of the markets’ worst quarters since 2009, a time when a credit crisis was underway. International equities posted similar results, posting a negative 15.7 percent return for the quarter (MSCI EAFE Index). U.S. fixed income, however, made significant gains, no doubt helped by the rising equity volatility and the uncertainty that accompanied it. The broad U.S. fixed income market posted a strong positive 3.8 percent return (Barclays Aggregate Index). Yields, accordingly, sunk to record lows, as investors flocked to the safety of high quality investment grade debt (and to a large extent, U.S. Treasury Bonds).
Generally speaking, if 401(k) plans are meant to be used to augment retirement income they may be considered a success. However, if they are expected to serve as the primary source of retirement income (along with Social Security), success is proving to be elusive for most participants.
U.S. Equity markets were flat for the quarter (with the DJW 5000 index posting a zero percent return), but not without experiencing a roller coaster ride. The last month of the quarter saw equity markets heading significantly lower and well off their intra-quarter highs, and the last four trading days brought about a dramatic surge to the upside, erasing the quarter's intra-period losses and bringing U.S. equities back to levels they were at only three months ago. International equities posted slightly better results than their U.S. equity counterparts, returning a positive 1.8 percent for the quarter (MSCI EAFE Index), but also showing similar volatility. U.S. fixed income made significant gains, no doubt helped by the spike in equity volatility that was witnessed over the quarter. The broad U.S. fixed income market posted a strong positive 2.3 percent return (Barclays Aggregate Index).
Plan assets and average account balance are generally the two more significant demographic factors impacting total 401(k) plan costs, but plan services are also a primary driver of cost, especially when a plan sponsor takes the plan to market during an RFP Vendor Search.
The payment of expenses by an ERISA plan (401(k), defined benefit plan, money purchase plan, etc.) out of plan assets is subject to ERISA’s fiduciary rules. The &"exclusive benefit rule” requires a plan’s assets be used exclusively for providing benefits. ERISA also imposes upon fiduciaries the duty to defray reasonable expenses of plan administration.
U.S. equity markets continued where they left off in 2010, posting another strong quarterly return of a positive 6.1 percent (DJW 5000 Index). International equities lagged their U.S. counterparts over the quarter, posting a somewhat smaller but still attractive positive 3.4 percent return (MSCI EAFE Index).
At a recent virtual PLANADVISOR National Conference, panelists identified five ways plan sponsors can re-focus their goals for plan significance and success.
1. Market Your Plan – Plan sponsors are becoming more paternalistic, and therefore reaching out more to help participants make informed decisions concerning their retirement. Plans sponsors should ask themselves: &"Is the plan currently being marketed to participants as a valuable component of the company’s employee benefits package? If not, how can we better promote the plan?"
Diversification within a retirement plan includes access to a variety of asset classes – primarily cash equivalents, U.S. and international equities, and fixed income. As one of the more conservative asset classes, fixed income is primarily utilized to generate income with limited volatility, making it a somewhat more popular investment given the economic conditions of the past few years. While fixed income investments can post negative returns over certain periods, potential losses are lower when compared to equities. In addition, fixed income often adds a crucial diversification component to the portfolio’s exposure to equities, actually enhancing the overall risk-return characteristics of the entire portfolio.
U.S. equity markets finished the year strong, posting a positive 11.6 percent return (Russell 3000) for the fourth and final quarter of 2010. International equities continued to lag their U.S. counterparts, but nonetheless posted a strong absolute return of a positive 6.7 percent for the quarter (MSCI EAFE). Across U.S. and International equities, the riskiest small capitalization stocks out-performed. U.S. fixed income (the more conservative asset class from a risk perspective) posted quite different results, returning a negative 1.3 percent (Barclays Aggregate) for the quarter. Fixed income yields backed up, sending prices lower, causing the 10-year Treasury bond yield to jump 80 basis points (over the quarter) to finish at 3.3 percent. In the end, risk was rewarded for the quarter, and so it went for the year.
On October 20, 2010 the Employee Benefits Security Administration ("EBSA"), a division of the Department of Labor, issued new regulations governing fiduciary requirements for disclosures in participant-directed individual account plans. The new regulations significantly expand the information that will be provided to participants and beneficiaries, effective for plan years beginning on or after 1, 2011 (for calendar year plans that would be January 1, 2012).
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