Consultant Commentary: Do Specialty Investments Belong in a 401(k) Plan?
A “specialty” investment is an investment that does not fall into a core asset class (e.g., those most often found in defined contribution plans). Some of the more common specialty investments are emerging markets, science and technology, precious metal and real estate investments.

Nowadays not only are plan providers offering more investments, but also a broader range of investments. Subsequently, many plan providers offer over 100 different options across a wide spectrum of asset class categories, of which approximately 15% are considered specialty investments1. Due to their unique focus and characteristics, specialty investments can sometimes be alluring to investors, especially in periods of strong returns. While specialty investments can add value to a portfolio when used properly, they can also be extremely volatile and quickly deteriorate the value of a portfolio if used improperly. 

In our experience as 401(k) plan consultants, the majority of plan participants have limited knowledge about how to properly allocate their contributions into these investments amid their complete lineup of investment choices. Some will simply use the 1/N method and equally divide contributions among all the investment choices. Others will focus on what's hot and chase past performance, irrespective of risk. These reasons suggest that specialty investments make poor investment options for a 401(k) plan participant. What's more, specialty investments typically hold assets that are already found in well-diversified domestic and international equity and fixed income portfolios. This is generally not clear to participants, who may contract undue exposure to a certain asset class when investing in both specialty and (more traditional) diversified investments. For example, some participants think gold is a conservative investment. In fact, the volatility (as measured by standard deviation) of the price of gold has been 28.3% since 1970, while the S&P 500 has experienced considerably less volatility at 18.1%2.

In summary, offering specialty investments in a defined contribution lineup can encourage less savvy participants to take excessive risks and reduce the diversification of their investments, thus jeopardizing their long-term objective of funding retirement. To discuss this topic in more detail, please contact Grinkmeyer and Leonard Wealth Management at 1-866-695-5162 or email info@gandlwealth.com.
Sources: (1) RPAG proprietary database; (2) standardandpoors.com

Summary Plan Description Reminder
A Summary Plan Description (SPD) describes the key provisions of an employer's retirement plan and participant rights. SPDs must be disseminated to newly eligible participants within 120 days after a new plan is established or within 90 days after a participant becomes eligible to participate in an existing plan. In addition, SPDs must be disseminated to all participants once every five years unless there have been no amendments to the plan during that period. The DOL issued final regulations on electronic delivery that indicate an SPD can be delivered through an electronic medium if all the requirements are satisfied. Contact Grinkmeyer and Leonard Wealth Management at 1-866-695-5162 or email info@gandlwealth.com for assistance with your Summary Plan Description or other plan-related documents.

Simplicity: A Best Practice for Retirement Plans
JP Morgan recently published their Insights newsletter with trends in 401(k) plan design. The findings reveal that “Autos” are growing in popularity. The “Autos”, which are starting to be known as the “Auto-suite”, include Automatic Enrollment, Escalation

and Rebalancing. With automatic enrollment, employees begin participating in the plan usually after a grace period. Contributions are made at a pre-determined rate and invested in a default investment. A participant's active decision, of course, can override any default process. At the end of 2009, 43% of their clients were using automatic enrollment. Additionally, 57% of their clients with automatic enrollment are also utilizing automatic escalation, which is a preset increase in the deferral amount each year. Auto-rebalancing allows participants to have their account rebalanced to a targeted weighting. JP Morgan's research on participant behavior revealed some interesting information about how participants are not necessarily managing their accounts with retirement in mind.

1. 68% of new participants enrolled due to a plan sponsor decision. This shows the importance of automatic enrollment to just get participants into the plan.
2. Only about 10% of participants ever made investment transfers, which shows that most participants are not taking an active role in managing their account.
3. Contribution levels start low and rise slowly. They find that participants don't actually reach a 10% contribution level until they reach age 57.

Taken together, certain best practices can simplify the participant experience. JP Morgan suggests the following:

1. Utilize automatic enrollment for both current and new employees.
2. If an employee opts out of the plan, sweep them back in at regular intervals.
3. Use a low default deferral rate to minimize impact on take-home pay.
4. Use automatic escalation and require participants to opt out.
5. Set the automatic escalation at 2% increments and set the cap at 10% rather than stopping at the match amount.

Inertia is the natural enemy of most employees, who in many cases just don't know what to do. To learn more about the “auto-suite”, please contact Grinkmeyer and Leonard Wealth Management at 1-866-695-5162 or email info@gandlwealth.com.   

Communication Corner: The Impact of Inflation
Inflation is one of the reasons people - especially those in their 20s and 30s - are often surprised by the amount they will need to save for their retirement. Because of inflation, future costs will almost certainly be higher, and the nest egg needed to produce the income you want will be bigger. There are several ways to help combat the ravages of inflation on the value of your savings. If you are not sure, consult with Grinkmeyer and Leonard Wealth Management at 1-866-695-5162, or, if you need an editable version of the memo, please email info@gandlwealth.com.