Page 1 of 1 13

-
Spurgeon, Mellsss EBSA

From: Greg Wait [gwait@falconsrock.co~

Sent: Wednesday, April 25, 2007 10:41 AM
TO: EBSA, E-OR1 - EBSA
Subject: Comment on 401 (k) Fee Disclosure
Attachments: Target 401 (k) Article - reprint.@

I recently read that the DOL is seeking comments on fee disclosure in 401 (k) plans. I own a small investment consulting firm that does
work with qualified retirement plans. In my experience, the Rrst step is to motivate plan service providers to disclose all their fees, so
the plan sponsor is truly aware of the total costs to thelr plan. The market is beginningto dictate this, and as a consultant to plan
sponsors, part of my job is to uncover all the hidden fees associated with the adrnininstration and investment of plan assets.

Fee disclosure to participants is more tricky. In my experlence. participants have very lime experience or knowledge when it comes to
evaluating their 401 (k) investment choices. Usually, they focus strictly on recent returns and then make bad decisions. If fees are
disclosed to participants, there is likely to be a fair amount of backlash as employees who are not experienced in judging the value of
services for their cost are exposed to fees that they may view as high.

If a plan is offering a variety d mutual funds, I think that slmply adding the fund'stotal expense ratio to a fund fact sheet (with a fund
description and return history) would be the best way to disclose investment fees. Of course, fund prospectuses include expense
information, but employees do not take time to read prosp&uses.

I think a better overall approach is for a plan sponsor to pool all plan w e t s and assume oorrtrol of the investments, similar to the
approach taken by defined benefit plans. Poollng assets, for many plans, would reduoe the total investment expense for all
participants, and would likely result in better long-term investment results. The lower investment management fees could be disclosed
to participants on an annual statement of values. along with plan returns.

Attached is an article I wrote, published in the Fall 2006 issue of the Journal of Pension Ben&, addressing these and other related
topics. If anyone in your agency is interested, I would welcome questions.

Gmg Waif
Falrons Rock Investment Counsel, L LC
1045 W. Glen Oaks Lane, Suite 1M
Mequon, WI 53092
262-240d9f9

This message may contain privileged and wnfidenfial information, and is intended only for the use of the person(s) named above. If
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 ARTICLE

The Target Over t h c pigst >Ir yrn rq, a d r a m a t i r rhlft has

uccurrrcl in thr q ~ l . ~ l l & rrctlrrment
rl plan markcr-
nS rlrt;nrii i o n r rt huclnn plans, and morc spr-
III~CP>

40 1(k)Plan: A t , ~ i r t -IY
~I l (k)plans, have become rhc p r c d o n i i ~ ~ u ~ ~ i
offered by US C . I I I ~ I L ) ~ C ' ~ SA. h
r r t l r e m r n r benefic
d r l l n t d brnefir: pension plans havc I ~ Y iru ~~ It .I[orl

Results-Based tcrmlnarcd by many cornpanres, r h r I>urdt.r~

mcnr savlngs has fiallen s q ~ r ~ r rr lIII
our C I C I LUIlS.
r j t rcril-P-
y ~ l l c51101111lers nt

Model By rrrarly tlbjectivc mwsutcs, the 1101(C) plan sys-

ie111 l ~ a sbccn ;I 11enirn1loalr qurresx. AF a major part
o1.our newly 1 I r ~ c r i h ~"rr\vncrship
Tj ecnn~rny~''ivork~rs
have contrih~lrr-rlvaqt w r n s o f money into rcclrcmcrm
plan arrtjunrs. iln esr~mated5 3 r n i l l ~ o nArnt.rir~11\
currently plrttc.ipatc in IU 1 (k)piarls, and t l l r y I ~ l v c
:t~,cu~nulaccd ovcr 92 trillion i r l p l u ~UsseLs. [ S t t
"How America Saves 2005-A Rrporr on I7~ngu:irrl
In vrder to occeotuurc thc positive a ~ r i b u t e sof our L U U ncfincd
~ CurlcriLutiu~lPlu11D ~ r a (" t j c t . 713135).]
Alrhough nut the xllust dt.rnu~~llru.lcl:~ploye~h ~ n r fti
40 1 [k] sysktr), yet irnpr-ow on its shorkomings by pnlgram (this is reserved lor I~rdl:i~ tnslimnre plans),
ir~co:urpuruIingelements o f ~ruditionalpension plans, 401(k) plans 11;lve become thr musr . ~ l > [ i r r r ~ a t cbenefic
d

u
we preser~~ r-esultsorienkd plan design referred to uflrred I>y employers; w e q rllnugh cmplnyers incur far
lcss c o s ~rhan tra1ditinn:~lpensinn plans or manv othcr
as the Target dO I M Plan. A resulfs-based approach hen~firprtrgrAmr.
will Lc~erassist our notion's workhrct? in achieving a l l the success achlcvcc] by thc i f ) l ( k )
Ypr, w ~ r h
plan<, rhprt are SCPIOUS qucst1ons about whetllrr r11e
adequate retirement securify.
sysrem w111 provldc sufficient f i ~ l i l r l r i a\l~ . L L I I ~ I ~ Irjr
l'ururc rctircts. Artltlus UJI his S L I ~ ~ C C wit11
I ht\,~rlllnt-<
bur-h as "Trnin Wreck Lut>mr-~ O I nnnrnrrc,"
- "Poll:
Arrleric~rlsWurry About Funding I~rtirrmrnt,""Many
Arnericnns Fail ro Herd R ~ r ~ r r n i c nWarnings,"
c and
~ < s r I l r r rement"
"Many People C l ~ ~ r l Alm11 ~ arc prwa-
lent in newspalwrs and rradr l a u r n d r . Indced, rhcru
are some alarming sratlFr1c.s:

()v(-r nnr thrtd <ifeligiblc cmplogccs (37; p r r c r n ~ l

rln nor partlclpatc in rhc cmploycr's v u l u ~ ~s;lv r;~~~
InKs procram. [Sa"Huw Arrlrrictl Saves 2005 - - A
Grcgoq I).Wkit. CEHS. ir prcvldcnt and f o u n t ~ l nrncrnht.r
~ Kcporr on \'an~uard 2004 Delillrtd Cnnr r i h ~ ~ r i c ~ n
~ Paicons Rock Irlvcsrm,-nt
rri' the invtarmmt ~ o n s i l l t l nfirm Plan Uata" (Ocr .2005).1
C.nur~sel,L U ~n hl;lwsirkvt, WI. Falcons Rock pruvidn ~nrc~t- rn Moru tlrar~half nl workers snvinp. fnr rrrlrernent
rrlvur IOJ~*.IJ~LIII I~I%;ECJ tr3 a ~ b r i r t yof fiduciaries. Grtg i s a have l r s s ~lvallJS0,OOi) r,f tr>tal 5 a ~ 1 n g s1Sce
.

p ~ h t~ l i r v !t c ~ rrl111l ruljr~lcii~enlberof thc Mi twaukee Chaprtr ot

Einployee nenrfrr Il r-rcarih lnsrirucc (EBRI) 2006
Rrrirrm~nt(:nnfidtnrt Survcy "Will Mow uf Us
(.crrifird tmpluyt.t. Flt.lirt;r Sprt i;~llat,\ unrl w x t i v e mcntbcr ut
HP Working Forevrr!' hy R u t h Hulrnurl, Cmig
th,. W'isconsin Hrr1rthrnen~ i,d.
1'1~111 I'"~~-.~~LIII.II,~.
Copeland, and Jack VanDcrllri (AIK 200C>).]
Only 40 pyrcent of wol-ken inr! ate they or thcir
The autlior r c s ~r (h ~ l l yacknowlcdgcs Jrwn frrr ltrr i r r r ~
1rbrt11
~ P U U S C 1 1 , .I~ cl~finrd
(.-II~1
~ benefit plan, yet 61 Frri r u t
rrihutions to this art!clc Mr. Wmr hn%,I p:hrrrlr p r i 1 r l 1 1 1r111
~ ~ h r
ray they are expcccing to rureive i u c o ~ n ctl-om w r h
l : ~ r ~ 401(k)
ct Plan dcsjgn prl>rr%.. Hr rrl.t) Ilr Ly a l ~ a i at
rr;illl~rl l a pian i n rccirerrlrIji. [Sex F,RKT 700h I l t r ~ w r n c n c
gzrm~rir[u'~.;:;on.~wk,~ot4 cclltr;cl,occ slllvpy 1

This article was republlshcd w ~ t !perlnlsslnn

~ tram the Journal of Psns~onBenehts, Autumn 2006, Val. 14. Numher 1 , R ZU06, Aspen Publlshen. Iflc All nqtlts reserved.
For more lnformationon this or any other Aspen puhllr;ll!nn, please call 000-868-8437 or vls~l
www aspcnvublishers.com.
 The ~nvcsrrnmtreturn of the avcragc invcsror in The Target .fOl(k) Plan
a stock mutual fund was jusr 4.2 pcrccnr, frum Tllr typical dlll{k) lrlnn ;nvnlvrr nnrncrnus, yet
I'd84 to 2002, whilc t h c avcmgv tlrlrirwl return hasic, rrnl-rlnyr~r l ~ r i ~ ~ f l n c :
c ~ thc
f S&P S O 0 Index w u s 14.3 ~ t c v r ~[SLT
t.
LOO', DALBAR Quar~tituticrA ~ ~ , l l ~oir iInvestur
s 1 Shn~,Id 1 mntributt: to thc plan?
Br\~uviot.l 2. 1 lna much should I concributc tu rhv F I ~ I I ?
Nearly 30 per-crnt r b f tr.rmin.irthrl r m p l n y e ~ schoose 3 . Can I conrlnuc ru live my lifestyle il 1 c u n ~ r i h u t e
to tnkr t h r i r ~ i r < t r ~ h u t iA<
o na lump-sum cash ro r l ~ cplan?
payollr, p r d o r n ~narrly t h o w who are y o u ~ c r 4. How do I chuuse between all t l ~ invcstmrnt
t vrhi-
l s relar~velylow account b a l a n ~ r \ .
~ n d l v ~ d u lwith ~ l e soKered?
IS& "How Amcrtca S a v ~ s2005-A Rcporr ulr 5. Shoulcl I wntrh mj- rnl rrtrncnrs, and consider
Vanguard 2004 Uufined Ct)ntributiuir Plv11O.ti,l "1 chnngrs, nn s dally har~s:
6. Tluw d n 1 makr- lnvrrcment changcsl
Plan sporisuts a11d rttirr111~1lt pIi111 wrvice 1~1-ovicI- 7. What dn 1 do w ~ r hmy 401(k) rnonoy whet1 I
crs have sperlt i t ~ ~ r e d i tu~nuilIlrr le o t t i n ~ and
r mnrq change jobs!
011 p ~ t i t i p a r l itcluc;~~in~-i prr>&Lams, yet n ~ s of r thrw H. Wlut do I d o wrrh my 401(k) rnorley wlle11 I
cffurcs havc noc rcsulte~lin optim.+l ~ m p t n y r hrhavior. r rc:irc:
In onc stutly measursng rhr e f i ~ t - t ~ v r n cos fs a curtom- I). What ~f thure isn't e ~ l u u g h~ilolw!: i n IIIY . I C C O ~ I ~ ~
i;.r~i r r n l > l ~ ~ yrdtlration
w campaign, a largc cmploycr r o rctiru?
qi~ilxrrlrml,!nyrcs hefore and after thr program
wlrh I 5 vestno questions covcrlng h a w ~ H V ~ I I n~id X Tl~rsedrcisio~lsnrr ovrnvhrlmi ng t,>rmany, ~fnot
in\~csr~n,g pr~nclplcs.Prior to the outlay uf ~ ~ l l l l i r ~ r r s most, ernl.1loyrrs Pmrrn~tinatinn(dtlayrng decisrons)
of dot l ~ r an s thc progranis, p a r t i ~ i p ~s ~, 1111 r r :tvel;tge, anrl inertia ( r l o ~ nn n~ t h ~ n goften
) happen regarding
ariswered 54 pcrtent 01- i11r q ~ ~ n t i or anr ~ r c t l y .After t t c ~ u s cchc crnployccs have t o B I ~ > W ~ I
plan d e r ~ s r n n b
the prtrgruln, they , ~ n s ~ t ~ r r5c5r ll'ejirnr c-nrret.rly {.VM s111'h questl(mP tor ~hcrnscIr,cs.
Ir~>plicu~inns 01- P i a ~ t i ~ i l . ~l<pll.~lrior
;~nr h r Plan I)rsijin. 'l'hc 'Lhrgcr -10l{k) Plan design 111ulre5p a r t i c i p i inn.
by S l ~ l o m oDenarr /i, Ph17 ij:~ n. 200h}.) Illwsrlng, and distr~l)uciorrdecisioris easy an<! mr,ln-
Srirh partir ipanr hrhavlnt r reates a s ~ i c t aconccrn l irlXru1 fix e ~ l i p l o ~ r eas
s . ouilinetl in Exhihit ? In t ~ r ,
a h n ~ i t h r ability o r US wtlrkers to maintain rhcir rhc Target 4Ol(k) Plan tnkrs m.my nf the retirement
~ t a n d a r dof I iving tn rerlremcnt. Our Social Security pldlrlkillg &cisions ~ i l of r the h . l n t j rlf
~ cmplflyees,
system ~ l l undouhrcdly
i hc modified to clddress it, iul~ia:h is rlesirahl~for many wurkcrs. 'I hls dcsi,qn is
financial and structural irnbda~lcrh,dci;~lrdbrliciii inrrndrd tn mirror the sccnrlty oia dcfincd bcnufit
plans cunclnuc to declinc i r ~relevul>cv( u l ~ l ~ ~ ~t h~el ~p el i l'lan, w lth the increased ~ ~ i . u m u l . i t ~potential
on of u
IS anctclural cvidcncu of surrir rewlgrnre ni rl~escplans drfinrd rnntt~biitlr>npkan.
among s1rvi1It.r e r r ~ ~ I u ~ t . rand s ) , IC-tircchmlth carp T h ~ plan
s drsrgn IS rcsulrs-bastxi, as tllc j>l.lrn,lry
custs are s p i ~ : l l i uupward ~ a t a trcmrndot~.;parr. Ir object~vcIS for cach particip~lrltru uc1lic.r~a rr,lsun.lhlr
S W I ~ I Sc l r u r t l l r l ~C I I I ~ I O ~ ~ Pnerd
S Il~lp. lcvcl of rcrtrcrncnt irlcorrlr, whic11 may he l ~ r u v d dar
Plan s1)nnst)rs :IIr h g i n n ~ n gto address these issucs rcriromcr~t.irr rllr Lrun 01-n monthly inst.illmr-nr yay-
with plan f r ~ r n r r cc14ch a<alltomatrc enrollmcnr, auro- r n e ~ ur t s hr a ~ ~ r n r n a r ~ r a l l y
~ t a~uluiry.P a r ~ i c i ~ l a nwill
rnxrir s : i v i n r ~r.ttc I n ~ r r a \ c s and , rargcr rcrircmcnr erirollrd in rhe plan w ; t h .lnnllal .]ntnmatic contribu-
clatc or Ilfr-L.yr:lctunilr. 'l'hc rcccncly passcd P e ~ l s i u ~ l rion incrensrs, will l ~ a v rrhrir aiirlunt professionally
I'ratci:ion Acr o f 2006 cncouriges autu~naticenloll manafi~dhy an invtstmtnt adv~sor,and will redize a
mcnr and automatic savi~lgsr u l r illcreases by cklnr~ty- m r a n l n g h l benefit a t rcrrrcmcnt.
I ~ that
X ERISA prrtlrllpis sriltc latrms tli.lt m o y prnhihir
thib f ~ a t u r eand by oilci ing s.& harhnr rrrarmrnt for Accumul~tePlan Aasetr
pl.tt~--w i t h n~ltornntirrnrnl lmtnr. T h c h r p r ? 40 l ( k ) Plan 1.71-orrsshrKin<w ~ t ha
A rnmprehcnslve ncw 401(k) plan dr31grl tlrat i* I;II~'.I h r ~ t . t rrr
~ t rcplacement ratio c a t c u l a t ~ uf i~l r~
rcsulcs-bascd and rhar i-keh rhe d r ~ i s i u trn;~liing ~ hnr- all tlrSiblc cmployccs. Many rvtire~llcrrr I.TI;IU> (rrar--
dc.11awilv fi u~nlrmployees mn he a viahlc alrernattve, t ,rlancrs u ~ l rrmerul>r~
l ttlr riirgrt h r n t t ~ rclrhnrd
an11shorrlt l trr t,r)nqidrred by anyone with rr <ponslbil- c t ~ ~ ~ t r i b c ~l tt li;o~ ni t~ l t ? > i g ni n, which t h r rrnpluvc.r
ity fnr a cl)rl.clratc dcfincd concribu~ior~ plu11 ~ l r t r r r n i n ethe
~ rt t lrrmcnc bcncfir dt31rrJ Cut irr

Ihrs ;lrllrln was republtshed with permission from the Journal of Pensmn Bcrlel~tsA u t l l n ~ n 2UUti, Vol. 14, Number I . lp 2006. Aspen Publishers, Inc. All nghts reserved
For more ~niorrnat~on on t h ~ or
s any other Aspen publicabon. please call 800-888-843, nr U I E ~ w : aspenpublbshers.com.

-- I I IPR h~IY.e*llndd 23 <>*

I
5 . 1 3 : ~1~1 ~ 2 r , ~ l u l :
I
 1nvest111e11 t Advisor
M a l l a g e d Accounts

Fivc Target Dure PorL10110S:

" "
XA lbstilrs-Rased
*..x Employce Ch4-J l c e of O n e'
y +yx
-Xxx r)esign
cXX {NRU-Uased Def;lult]

3-5 T~rgclipr Risk-Uased Yortiolios,

Currrnt
Plus Ir- IO Mutual Fund Menu:
Ileaigns
Employee Choice
4
6-1 n Mutual Fund Menu:
Employcc Choice

4
10+ Mutual I i ~ l n d s ,
Plus Self-Direrr~dRmkerage:

r.mployt.t.s(rriuch likr u rlriinecl k r m r t i r I ~ l . j~ 2nd n an must rcplacc butwcrn 7 5 and 89 perctlnc ol i h c i r prc-
a c t ~ u ~ r i . cl l; ~ l c ~ ~~l ;nr ~ni s m a l i r to drrrrmlnr. r tlc level r c t i r c m c n t 1ncorII.t ( d e p ~ d i ton l ~ ihe preretirement
r ~ ;lilrlual
l r e tda c h ~ ~ a r c l c ~ p ~ n r ' s incomc- Icvclr t r i c1rdt.r 10 rllairlrain thril- h:t2nli;ard
c o n t r i t r n t i o n r r ~ ~ ~ i r to
account T h e r m l - p l n y ~then r makes the rcqurrcd plan of Iivirlg. TSw The Aon C n n s n l r i ny:l(;rnrt:~n S r ~ r c
r - o n t r i h n t i n n , hut parctclpants nssumc thc l n v e s t m r n t I l ~ i i v e r s t ~2004
q R r r i r r l n r n t Inl-ome t t t p l n c e m e n r
rlsk!return, w h ~ c hrcsulrs In a11 accuurlr billuricc 111.11 Ratio Stndy.]
prr,llucrs d monchly hcncmlit a i r i u r r ~ i arl r t i r e m c l - ~ r h . ~ t As i l l ~ r s c r a t t dIn E x h ~ b L~, tSLY ha1 Sucurity is
dppruxirnarca rhr target. expected co rcplacc a h ~ ~ h cperf-ctlcagr -r 01-pel-ctire-
I n rhc. Target 401(k) Plan, r h r t . 1 r ~ r t I > r ~ ~cal- ~fit mcnr incomo fur I ~ w r r - w r~t ~~ ~ep l o ~ e te1s7; e f p f ~ ~t , h ~
c u l d t l u u i s Lase~lon a allesirrd r r y r l . ~ i e m r n tratio for annual ~ I I L U ~ rJe~q~u i t - ~ ~i10m 1 ~ r r i m r ~ I ~ m p l n qnurces
yer
r u c l ~p.irticil.mnt. The wplarcmrnr c.irto 1s a pcrson's w i l l Ijr i r d u c c ~ ltor this g r m i p . In thr target benefir
gtnss Inrnmr after retirement, d t v l d c d by his ur cnlr ul:\r ir>n. t h r Inwcr-wage p a r t ~ c i p a n r sw ~ l havc l a
her gross incomc ~mmcdiatelyLrL~rrrrrtic.mcnr. A w l a t lvttr: low r c q u i rcd rcplxcmu~ltrilric~[run1 11ic
pcrsorl's L L f i ~ ~ - r r ~ i r ~~l n~ n~ iri !ni li!n t . 0 will ~ ~ typ~cally plan. and s hmaller r r q c ~ i r c dannual r r r r ~r l b l ~ t r o nto
IIC rlcl-ive~l f rrtm S n r ~ a Security l bencfirs, and p r i u r c rhvir accotr nrs
and cmplcryrr qt)iirccs. Aon E:onsultir~g, i11 i t c 2 0 0 I Ilp f a c t o r i n g an assumed annual wligr i r i ~ ~ r ~i111r1 l c . ~
Keplaccmcnt R3r1o 5rudy, cc~tlcludc~l Ibar farr~11ir-r investmcnc rcturn HS'~!ITII~I ium. ~ - r ~ l l i ianntial
O: ~ - ~ r Icnn-

This anrcle was republished with permission from the Jourrial of Prr~.;lo~~
benefits. Autumn 2006, Vol. 14. Number 1. B 2008. Pi~bl~shers,
Inc. All nghts reserved.
Fnr mnw information on this or any other Aspen publlcat~on,plcase call BUU-Hti&M97 cr wsit w.aspenpubl~shers.wrn.
 remarkably successful in incrrslslng plan parriciptrtiuri
[arcs and dcfcrral purcenragl. rstcb.
Eluh year, r h c replrkrr~lle~lr
~ x i ~:.~lculntion
a will br
111ude lo^ c;lch part icikron t to arljnrr tor rnrrpnt Arrnilnt
bainncrs 2nd i n4:ornr Itv~ls.This annual ralrlllation
will help mtrnltnr t h r participants' pmjirrss rownrrl
ach~evlnyrhr target rcplaccmcnr racio, and allvwh fur
adjustments co hc madc hascd on invcsrmcnt rccurrls
char arc higher or lower than the usu!llrd rJtr of
rcturn used it1 the cul~ulatirrr,.
AII a ~ i ~ l u arepurr
l slluuld be prcparccl a~lclclistrih-
uted to ewll plan p.u~irikk:.illrwirh n simple illusrrs-
iiun ui-the teqirirr~lmnrrihution, sncl the pmjrrtrd
I-eriremenr hrlirt;r T h r . ~ n11;~ln ~ p a r t i r i l ~ nrrporr
r
'h131rlri ,nr l ~ l d ca nocirr: of the automatic salary dcfcrra!
amnunt for the follow~ngplan ycar. Parcicipants wlrh
lark( rcquir~dcontribution a m o u ~ ~ Lr s~ I br I rljcuur-
agcd clcc t a higher s d q defrrrul ,!TI provlditlg in
rhcm u " p r u j t ~ r e dshortiall" illus~riltion

Manags Plan Assets

T h r lnvrqtmrnt .ctruccure of /iOl(k) plans has
evolved from offtrira l u s ~a fcw mutual funds (rypi-
triburion, duscrilxd ;I< .I p c ~ r c n r a g ro f rilrrrnt income, cally proprietary tunds of a survict. pruvider) tu ijlcrrcj-
I S calculat~dfur rxc h prirrir il>.?nt F,mpioytr-provided ihly cxpansi\c proprarrts thar sumetimes o i L ~25 or
retlrurnerlt il~currict~crlna tirF;nrd benefit pension rnlm iavestrr~eritrl~oicr\l r ~ r$election by parricilbanrs.
pl;~r~ ;~iid
, current p.artl~.lpalt~ c (runt: c ba1~ncr.s.arc The avcragr plan oilers 18 Investment optir:n<; hc>rr*-
i l l b o l i l t to1 r~l i ntrl t h r calculatrtlr~. Upun dcrcrmirri- ever, the nvekage ~)zrtiril-r:inr~ J S P Fonly .$.& funds. I'lan
tion ot thr I X - r r ~ n t a gof e pay contributiu~irequired i i ~ I ~ O ~ C r.nnrinilr
I ~ S tn ~ d hind
d nptlrrns a t a faster pacc
ear h y>:irtIclpant, any cmploycr matchilip c ~ ~ n t r i b ~ i ~ i o n tli,ln partirtpants actually uw them. LSa How Amcrica
prrrenrdgr IS subtractrd, leclvit~g~ l l ,irnuilnt c ot ralary Saves 2005, A Heporr olr V a u i ~ u i r d2 9 ~ 4Dcfincd
Jctcrral nccdcd for LW-11 p u r ~ i c i p aIl ~F.u.arn ~ ~ lOF r <the C;nntrtbur~onPlan Data.]
requlrcd annual t u r i t r i L ~ ~ ~cnlr~llnr i o l ~ ;cln srr 11 Illstrated Emplr>yccs:ur himply rlut truilied trl 1rl;lilagc rh&r
in Exhibit 3. S u ~ lu, p1;11 design { w ; t l \ q r n ~ l contr~bu- l invcstmunrs ptuFt.rly, nor do innst partic ll~anrsI 3 . n P
r i t ) ~ ~[ora lower p.11~ t s ) pass nandis-
1 I r.ll'ti ~ ~ ~ p a l imusf tlrr dr<irt.i l l iiruc ra make snrh r-le('i<inns 1Ilahnra:c.
~ r i ~ ~ l i ~ l restingt l t i o ~11ndrr
~ ( ,ode Section 401(a)(.i). e ~ n & d u ~ rdui.~tion
c.c program< I ~ v hr e n ~ n t f f ~ c i v c :
Tile Targer 4 0 1 (l;! Plan includcs an aucomatic changing hehxvinr r~garclingplan tnvtirmc'ncs.
enroll m r n t fra:ure, whl<h is rhc lesser uc: ~ x ~ m p l nf c sF o r Jec~slon-makin,qarc widcsprcd
[,Sw AllianceElcrt~stcin,Inipl~cat 111nhuf Partiuipar~i
1 . The plan's default perurI1Li1ge {coni monl y 3 yc-r- Behavior for Plan D c ~ ~ gIny , St~lomuBrrlartzi, Phn
CCIII); or (Jan. 20UG)l:
1. 'L'hv required s;~laryrlrkrral a< rletrrmincd in rhc
rc.pla,..cmenr ratio r n l r ~ ~ l a r ~ 'l'hc o n . plan will autu- 1. It trn or f ~ w rhoircs
~ r are ava~Iablc,cmployccs arc
~ n ~ ~ i cincreased l l ~ each par[ 1:tpanr's dcfurril prr- n p t qrrnyly tn allocate their rnvcsrmcnts cvcnly
cencngr by 1 p r r e n t annually, unril ttte requirccl arrnsr the fund optlons.
empluyrr 1-nntrlbut~oni s reached or up to r l i r 2. When cmployccs are preserrtcd wit11 i n c ~ m s c ~ l
plan's maxllnurn suitrry clt.rc.x~-rilperrentage. invcsLrllcl~cchoices, rhry x r ~m(~r(.likely nor to
parr;ril-r.itr. or tn select the lowcr-r~sko p t ~ o r ~ s .
A u t o n ~ ~ trnnll L lment and auto ma ti^ L ~ I ~ I ~ron~ L I I I 3. Many employees i n v ~ r tuu t I I I U L ~ I(11- illcir rer i re-
inrwasc features havc lwcn aduptrci tly a n I nrrraqing mcnt savir~gsIIltr, 111ri1-r,wn eml~loyerk<rock.
number of largo crnpluycrs, nntl Imvr prrjvcn rd hc 4. ElnploYersrl>ar.r h ~ l tpcrtormers.

Thls i u t ~ cw.35
l ~ republishedwith
permission iron1 Il~e.mllmal of Pension Beneffls, Autumn 2006, Vul 14, Nurliber 1 , 43 2006, Aspen Publishers. Inc All r ~ q h brcstllved
For more ~nfnrmatianon th:$ or any otherAspet1 publ~r~tinn, please call 800-868-8437 or vlslt wmh..aspenpublishersmm
 1
Sdbuy Scale: 4% Investment Herurn: 7'2,
[irrent
Account
1ncorne
$y(r,o~r
Ratio
45%
~eeded
4.06')C
at age 65
4j ~ . [ ) y O
Ba l aI C
5 ,OUO
~
I
- ..

-. -
-p-
p -
-

! --
$78,922 40:;. +.~X'S 524.72''
..
-. . ..
~,UIJO
. .-

5')7,.5"2 45% 7.2 jfX, 45(1>14).1

.. -
. 5 7 0 0 "

- - - - -
3 ;o.ot,o 4" S7~,7975 40%
.- --
7-92:;. ~~0,064 5,000
-
4jr1.0t~t1 45 -
SR7.lq5 44% 1 2 .Hof& 397,L.) 1 i.11t)o
.-
$ ~<n.onfl 5" $;.?,03b: 7
i1>
; 1+78'7, 177,646 ,our>
-- -
150,000 55 $74.0 I 2 37'' z ,I ,,I .q $8(
- - r8iT2ij 5 .ooo I
$50,000 611 I $Bc1.8~~
-
q?"J 42.7:5'%: 303 . ~ - r b 5,ouo
-.. -
C ~ ~ l r u b t i rjwqiiwd
~nt hy-jwn Gacciu~dr.d i t t t r t ~ G
, ~ ~# t ~ i ~ / rRt ~ J U Y TAgilu~nfi
IlilrJ1 L ~ , k t ~ IVI.
.
--

5. ( ~ I I C UB ~ I I ~ L ~ C I r
~n. n
~kI ~
~<C
3 s e l t . r r ~ o i >they
, In rcsponsc to rhc well-dur u m e r ~ t e dpour i~tvc\t-
wrd cu not make r,h~npr.;~ n c has irrorttc~lw mcnr dcr ibiuris r r ~ d el ~ p*rtiiip.~n~s.
y lilc cycle h ~ n d s
rrhnlant-ing. urr [jri 1: udrlrd to 1hc 401 (k) n-#en11by :in i n r r r a ~ i n g
rllunlber 01 plan sl.,onsnw. Thrrr hind5 are prepack-
Pal-tiripants arc clcarlv ar a disadvariiuge us L(>II> aged, halanrrd pnrrfnlicl~wtrh varying risklrcward
pared t o the proccss-driverl, prufessiol~ull~ mnndgc-ci r h n r a r t ~ r i s t i r(.erta~r:
~. I~fe-cyclefunds arc rcfcrr~d
investmcr~rapproach used lly Iriocr delinet1 henrtir tn a< target-dart rrtircmcnr funds, whlch can br. ,I
plans. 'l'hc invustrrwIL1 colnmiitcr-s ot insritl~tinnalprn- urnpLe, cost-cKc<rtvc lnvcstmcnt solutiorl fur I,i;uly
sion plar~sbprtlcl 3 grwr lied nf rlmr and resocrces to plans. Mtnt propriutary life-cycle iimrls brrr- at) ly clncL
devclup appropriirre asset allnrar~nnstrategies, conducr )nvlestrncot r~iii~~ugrlrletll cr)niiinny, rvhirh lrrc<rnt<a
clue diligence on rhp pmfr.ssinna1 tnvestmcnt firms r!ktcllr~lpe(or tlw plan i i c l u i i , ~ when mnnr tnring per-
s e l e r t d tn manaEe pl.in dsscts, ncgarim fidv~r3l>lt. fm Lcrrtn.~~~cc. Also, nlrxr p n r r i r ~ y ~ n r(63 y percent) rhac usc
t t r ~ ~ r t u rfmm
r s moncy rnanagcrs, rnurliior prrfijr~n~lncc a l ife-cyr-lr fund sp11tt h t t r account balanccs hccwccn
of rhc managers. and makv necessity d j u s t ~ ~ ~ cron ~ s nnp nr more I I ~ ~ - ~ ' Y C funds ~E anti ochcr mutual furlds,
rht Invrsrrncnt stratugy. Returr~sachievccl by tlet~nrii defeating rhe piirposu of thc dcs~gnrvidiveisifira-
ct)nrr~hurtonp 1 ~ 1 1 5 Iwve Lvrn fo~rnrlto !.lt: rrrurns cion. I;r&Llfi-Cyclu Ft~rlduMa~urr:Plan Sponrr,r anrl
of dcfinr:d IwueGt plans hy :! yr~=r~-r.nt annually. [St# Participnnc Arlup~run,V x n g ~ t a r Cenr*~ ~l h>r I<rtlrement
Bar~luysCilnbnl Invrstorq, M In& The Gap! Why DC Rrsrar~h(Nuv. 2005j.)
Plnns IJnrlrrpprhrm I l l 3 I'lans. ~ n How d to Fix Thern, 111 (!he Tau-grt ,401[,k) Plan structurz, t t ~ cplan span-
by I h r r n n W a r ~ n g .Laurancc Sicgcl and Tirr~othyK L ~ I I I I s r i r may npt for nnc r)f tllrer lnvcsrrncnr mana1:crnurit
2004}.] . ~ p p r ~ a r h cas :sinfilr poolcd rnvcstmcnt portfulicj.
Sources nf chis dcf~ncdturitril)uiiun unclrr)*rrtor- managed accounts for c:ich p i l r t i ~ i p i u i o, r t a g r r - t l ~ t r
mancc arc nurncruits, bur illclurlr: rcrircmcnr f i l ~ ~ r l E.t~ch s. ~ l l c s cnpl.,~-cracl~~s rrrqjl lrs l r l a
pn)fcs\lu~ra!l~ 111;~rlagcd portfolln fnr plan parclc lpants
I . Prrvalcr~cro i retail r ~ ~ u t ~f11nr9~
i a l with relarrlvcly that wili trlctrase the r h a n r ~of ~ r n p r m drrlsk adjustcd
lllgtlSees, olren inrllirl~nghidden expcnscs suth as l-eiuc,n$over tinlr.
l ? h 1 o r snb-transter agency fccs. Poclled Investment l'orrfolich
2. Plan Fponsor and pxrrlcipvrti it~cusor1 the n > r l t ~ l a \ hs wit-h dcfincd L ~ r i c f i perisloo
t l ~ l d n sa ~ l dmnst tra-
funds uffi.n*J. rdtllrr than rlir d ~ v ~ l n p m e of
n t an diciorlul Jriillrflcunt r i l x i r i n n l-halls, the plan 5pr)nsor
iuvrrim rnt rrr.It?gy. czlu rhuosr r t ~ h n v r all 40 1t kj plan asseth p~ol;>b11111
3 . Pnnrly J i v e r < ~ f ~and
e d tncfficlcnr asscl ;~!lr~i.arions a l l y manajicd a( a . ; ~ n ~ poc>lcd [c pnrifblin A l-rlmdry
among pdrciclpant w.c-t)ul~ts. adwntngr oi rhis ;ilq>ronrh i s rhat a d i s ~ ~ ~ l l n c d

Th~sa r W e was republished with pemlsslon horn !he Jounlal of Pens~onBenefits Autumn 2006. VoI. 14. Number 1 , El 2011b. Aspen Publishers, InC. All rights rescrved
For mure Intonnar~~non thls or any other Aspen publ~cahon,please r ~ lBUU-R68-M37
l or Vlslt W %spenpubl~shers.com