Are Your Investments Secure?

A question I have been getting lately is: With all the news about companies going out of business, and banks being taken over, how can I be sure my money is safe? What happens to my 401(k) if my company goes under? What happens if my mutual fund company goes out of business?

Unfortunately, these are very relevant questions in today's market environment. Let me cover the most common investment types, and the "safety" of each.

Bank Accounts: Bank and credit union accounts, including checking, savings, and certificates of deposit, are insured against loss by The Federal Deposit Insurance Corporation (FDIC). This government agency has insured $100,000 per account holder per bank since 1980. The recent “financial bailout” signed by President Bush, has temporarily increased the coverage amount to $250,000 to help reassure depositors that their assets are safe.

401(k): If your employer goes out of business, your 401k and other retirement accounts are protected by the Pension Guarantee Corporation. Your retirement assets are separate from your employer’s assets – they belong to you. They do not guarantee you will make money in your investments, only that the assets cannot be seized as a result of failure by a company.

Mutual Funds: Mutual funds are subject to market fluctuation and therefore aren't guaranteed against market loss. However, under the Investment Company Act of 1940, your fund assets are protected if the fund company was to go out of business. Each fund is set up as a separate corporate entity, with its own board of directors who are responsible for looking out for the best interests of the fund shareholders. So, if your fund company went out of business, your assets would remain intact and, with shareholder approval, the directors could hire a new manager to oversee the accounts.

There are numerous government agencies and regulations already in place to safeguard your investments from fraud and misappropriation. However, as we have painfully been aware of the last few days, market fluctuations are something that each individual must bear. I would note that this is a great time to reevaluate your investments and level of risk you are taking.

Should Employers Give Investment Advice?

With the recent market volatility, many employee’s are questioning their 401(k) statements and employers often find themselves in a quandary: They want to help their employees with their investments, but by offering investment advice, they open themselves to liability if the employee makes an investment that results in a financial loss.

The solution was provided by the Pension Protection Act of 2006. The PPA allows plan sponsors and fiduciaries to appoint qualified advisors to provide investment advice. As long as certain statutory requirements are met, sponsors are not liable for investment performance resulting from that advice.

The Department of Labor describes a plan sponsor's overarching role as follows: “The duty to act prudently is one of a fiduciary’s central responsibilities… It requires expertise in a variety of areas, such as investments. Lacking that expertise, a fiduciary will want to hire someone with that professional knowledge to carry out the investment and other functions.” (http://www.dol.gov/). More importantly, having a trusted adviser handling retirement plan issues means an employer can focus on what really counts – running their business!

Hidden Fees in 401(k)s

By offering a retirement plan, business owners have a legal responsibility to make prudent decisions regarding the plan’s management. These decisions include selecting investments, choosing options like brokerage accounts or loans, and picking the right service providers. Many of these decisions require an in-depth understanding of plan costs.

There’s the challenge. Retirement plans have so many fee types it is rare that a plan sponsor can easily calculate the true cost of their plan.

Fred Reish, arguably the leading retirement plan attorney in the country, recently provided a few reasons why it’s important to make the effort to understand what’s being paid.

• “The DoL has taken the position that fiduciaries have a duty to know and evaluate indirect payments. In performing that evaluation, fiduciaries need to consider whether the total amounts received, directly and indirectly, by their service providers are reasonable. Further, fiduciaries must evaluate whether the payments cause potential conflicts of interest and, if so, whether the plan and participants are protected from those conflicts.”

The article goes on to describe two of the most common hidden fees and potential conflicts the employer should be aware of.

Employers shouldn’t just evaluate fees when they set up the plan, they should also monitor fees and expenses throughout the life of the plan to be sure the costs continue to be reasonable as assets grow.