Wednesday, September 2, 2009

Mutual Funds Explained: Options in Your Retirement Plan

No doubt about it, your options in your retirement plan are about to change. There could be some questions about whether they need to or not. But rest assured, the effort is under way and many of these changes will not be seen as beneficial for the majority of us.

Cost cutting is one of the ways businesses had hoped to survive the economic downturn that is now a year old. Payroll has been chopped (including paychecks), inventories have been reduced (to accommodate the skeptical and mostly unwilling buyer at the retail level) and in many instances, the matching contribution that so many companies offered as an incentive has been greatly reduced or eliminated (and there is no expectation that this will change before 2011 0 if ever).

All of these moves have resulted in a stock market that has risen since the turn of the calendar year (the Dow is up 3,000 points since January). This vote of confidence by investors has encouraged companies to continue to trim any portion of their balance sheet that might be too costly. Keep in mind that these moves do not grow a business; they merely sustain it. Keeping it propped up in this way is a topic for another discussion. But the trend is alarming.

This cost-cutting mentality has found its way into your 401(k). In the coming months, expect the recent trend to continue. One way of doing this is to add funds with lower costs. According to survey conducted with 85 senior level executives (downloadable pdf), whose jobs require them to find every nickel and dime on the balance sheet, the change is just beginning.

Over half of those surveyed have or plan to make changes to their 401(k) offering by the end of 2009. Those changes will result in less equity funds available than there were just two years ago. What they plan no adding is more funds with longer durations, such as bond funds with long maturities.

This change has resulted in the firing (and in some cases the hiring) of different fund managers. This change has seen a net decrease in the equity side of their offerings in favor of fixed income. Domestic equity funds were reduced as a result of such moves by almost 20%.

These changes have also impacted the default investment side of the equation. Ninety-three percent of those surveyed now offer a default plan for those who have not signed up with 71% of those plans directing their employees to target-dated funds.

These execs also plan on implementing a stress test to these plans in an attempt to insure that certain predetermined funding requirements are met. This move does not necessarily offer additional disclosures for plan participants, ebven as Congress is looking into requiring such actions.

While taking fiduciary responsibility has been lax in the past, numerous companies are looking at adding some sort of monitoring system to protect their risk of liability for not doing so. According to Carl Hess, global director of investment consulting at Watson Wyatt “The uptick in activity could be a sign that many funds were caught off guard by the crisis and are now trying to mitigate their risk exposure."

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