Transcript:

[00:00:00] Voiceover: Welcome to the Life Unlimited Podcast with Larry Heller. You deserve complete financial advice so you can confidently live your life your way for life. Now let’s get into this week’s podcast episode.

[00:00:19] Matt Halloran: Hello and welcome to another Life Unlimited podcast with your host, Larry Heller. All right, so we have been working very diligently on a four part mini series when it comes to 4 0 1 Ks.

[00:00:28] Matt Halloran: And today, you know, Larry, I know we talked about a lot of other stuff, but I think this is one of those sections that people are gonna be really interested in because, well, we’re gonna be talking about plan, so take it away, brother.

[00:00:39] Larry Heller: So, I mean, obviously investments are a big part of the 401k plan. Um, so we’re gonna spend a whole episode today talking about that.

[00:00:47] Larry Heller: And I’m not gonna point out a, things that I see when I look at plans and review plans, things that people aren’t aware of, things that people don’t have, things that people should have. So a lot of good stuff we’re gonna talk about on the investment side today.

[00:01:00] Matt Halloran: Now, we talked previously about a word, uh, that, that is important in the world of investments, which is fiduciary duties.

[00:01:08] Matt Halloran: So why don’t we kinda set the stage a little bit about, about that. You can remind everybody about, you know, episode number two of this four part mini series, and then let’s dive into how you make, uh, the investment selections.

[00:01:19] Larry Heller: Yep. So, um, episode oh part two, we talked about governance and responsibilities and fiduciary.

[00:01:25] Larry Heller: People don’t realize that they’re a trustee of the 401k plan, whether they’re [00:01:30] the owner or an employee of the plan. You have fiduciary responsibility in making sure that you’re selecting the proper, um, investments, the, the make sure the costs are reasonable of the investments, and there’s sometimes personal liability that comes along with it.

[00:01:47] Larry Heller: That. So, uh, so it’s not something to, to take lightly when you’re selecting all these investments. And there’s been a, a, a lot of lawsuits that have come through with bigger firms that have had too expensive funds in their plans. So one of the things that we do by hiring us is you can hire any. What’s called a 3 38 advisor, and they take the responsibility away from you 99%.

[00:02:12] Larry Heller: The only percent that you have is actually making sure that you hire a qualified 3 38, an investment advisor. And now you don’t have to worry about selecting the investments. You have a professional whose job, full-time job that is, is to select the investment. So that’s getting, that takes away from fiduciary, duties and learn more about it in the part two of the four part episode.

[00:02:32] Larry Heller: So, but now let’s talk about. You know, investment, investment selection. and I’ve seen, I’ve seen it all. I’ve seen plans where there’s only a couple investments and I’ve seen plans where there’s over a hundred different investment choices. Especially today. We’ll talk a little bit about more target funds.

[00:02:50] Larry Heller: People have 50 target different funds in there, but they have so many different investments in there because they want to make sure that they are, coming up [00:03:00] with the proper. Diversification. Mm-Hmm. So you do wanna create a lineup, an investment in lion lineup that has, a right amount of funds because you have a lot of different ages between your participants.

[00:03:11] Larry Heller: Some young, younger, some older. They may want different types of risk and funds. You have some people that have. Um, like a lot of risks. Some people don’t want no risk, so you wanna make sure that you have enough funds in there, but you don’t wanna overwhelm some somebody in there. So you wanna make sure that you have, equity funds, stock funds, bond funds, retirement funds, that you have, and within the classes you want to have diversification, large cap, small cap, growth value, international.

[00:03:43] Larry Heller: So you wanna have enough. Diversification, but you don’t wanna have so many different choices. ’cause you gotta remember most participants, they’re not investment savvy or really understand that. So if they now have to go and spend hours upon hours trying to learn about that, that’s not really what you really, what you want.

[00:04:02] Larry Heller: And that’s not really what they should be, should be doing. So, uh, so you wanna have a good, good lineup and you want to have a good lineup with enough diversification, but not too much to be overwhelming.

[00:04:13] Matt Halloran: But dude, I’m sorry. I haven’t really done this with you in quite a while, so I’m gonna push back on something.

[00:04:18] Matt Halloran: How do you know that? I mean, uh, is there a range that you, as a fiduciary and with your experience, that you know that a plan should have no more than this and no [00:04:30] less than this? I mean, you’re using, uh, words that are a little bit squishy there, brother, and I just wanted to see if you could clarify.

[00:04:36] Larry Heller: Sure.

[00:04:37] Larry Heller: So, so we kind of stay within the 10 to 15 Okay. Uh, range on the amount of funds, ETFs in there, depending upon the size of the group. and how do we come up with that? Well, like I just mentioned before, you can have a large cap value fund, a small cap value fund, a large cap growth, a small cap growth, an international, a re fund.

[00:04:59] Larry Heller: So you look at all the. Different types of asset classes and you make sure that you have at least one investment, one fund option in each one of these investment in, in, in CLA classes. But then you also have some other conversations with, the plans and the, uh, trustee. Some are really into sustainable funds, so you want to make sure you have a sustainable fund.

[00:05:23] Larry Heller: Some want. A, a technology, a high-end, really aggressive technology fund. So you might add that to your lineup. So it’s really talking to the, the trustee and figuring out, you know, who the audience is. And we will talk a little bit more about particip. To participant education, which we do once a year.

[00:05:42] Larry Heller: And when we have these meetings, I even throw that out. Is there a class that’s not missing that somebody would want in here that we should, we should look at? And uh, and obviously there’s also a lot of different types of bond funds out there and different risks within the bond funds out there. So, most of our [00:06:00] portfolios have that.

[00:06:01] Larry Heller: We’ll talk about model portfolios, which is on top of that. But you can, you can get a nice diversified portfolio with about 15 different funds.

[00:06:10] Matt Halloran: Okay. So, so thank you for that. And I, I understand that I was really boxing you in there. No, but, but I love, so one of the things that we talked about in a previous episode, and I think it was episode, I’m sorry, in the four parts here, is the.

[00:06:20] Matt Halloran: Series number one was that you had talked about the, the, the due diligence aspect of what you do as a person who helps manage these 4 0 1 Ks. And a lot of times in your discovery process, you’re asking those questions so that you can tailor that proposal on the backend. Now, so let, let’s talk about types of investments.

[00:06:37] Matt Halloran: So you, you kind of, you, you shot through those quickly. Let’s just. to deconstruct them for a little bit, uh, more. And, and the one that I really wanna make sure that you talk a lot about, because as a person who has participated in many 4 0 1 Ks, one of the things that I found very, very valuable, Larry, was the person who put the plan together.

[00:06:54] Matt Halloran: There were model portfolios. And so like I could understand and be educated on specific models, which, you know, makes it a lot easier for somebody who doesn’t know all of the other words that you might be using.

[00:07:05] Larry Heller: So try to break it down, in different bite sizes that people can understand.

[00:07:09] Larry Heller: So the first thing is usually in most, 401k plans, you’re either gonna have mutual funds and now you’re starting see a lot of ETFs, which is sometimes a less expensive mutual fund. their expenses a little bit less, but a lot of times the, the mutual funds, um, have a little bit more opportunities than some ETFs have.

[00:07:29] Larry Heller: So you’re gonna [00:07:30] see either an an ETF or, or a mutual fund. And what that is, is a basket of individual stocks and, um, or individual bonds. And one of the things that we see in this is. And am I going to get a little granular here? But if you pick a fund and it’s called the Constellation Fund, I’m just making something up.

[00:07:50] Larry Heller: Do you really know what’s in that fund? May have. Large cap stocks, small cap stocks, intermediate stocks, growth value, and you’re leaving it up to manager to move from one asset class to the other asset class. We, we really prefer pure, um, type of funds. What do I mean by that? That we want a fund that all they do is their, their specific, expertise. So we, we, mm-hmm. We just want, let’s say a small cap value manager. And the fund is only gonna be small cap value. And a lot of times that’s actually the name of the fund. But now the participant really understands, okay, if I’m in this small cap value, I’m small cap value stocks. So creating a, a fun lineup, which is easier for the participants, makes it one.

[00:08:38] Larry Heller: Easier for them to understand. But now if they wanna select their particular lineup, they can go and pick and choose and select which ones they wanna do. And they’re not worrying about, okay, I have this fund that does similar to what this fund does, and they’re moving in different directions. Hmm. So, so that’s really kind of the first thing that [00:09:00] we look at and we, we recommend is, is stay pure in your asset class type.

[00:09:04] Larry Heller: the second thing is, do you want. Kind of index or active, and we can have a whole podcast, Matt, just on the difference between index funds, active funds, or kind of a combination funds, which we look at a lot, when we put our funds to, you know, funds lineups together. they’re not indexed, but they’re more passive type of funds.

[00:09:24] Larry Heller: and again, you know, talking to the owners and talking to the trustees and explaining to them and explaining why. We prefer more passive funds than active funds. But again, that’s another choice that you can make and you can have mostly passive funds and then add a few active funds. So you could, you could have both in your, in your lineups to give the participants their own, uh, preferences in their own choices.

[00:09:52] Larry Heller: So that’s another kind of area to look into. and then, another one is really what we are calling target date funds. So a lot of people now, the participants, they don’t really know what to, what to choose. So how much I. Their money should be in stock funds. How much of money should be in bond funds? I don’t really have any idea what that is.

[00:10:13] Larry Heller: And then within each classes, they have no idea how much they, they put in there. So there’s a lot of these retirement, so-called funds, a lot of them call target date funds. So let’s say you’re planning on retiring in 2030, you, you can have what’s called a target date [00:10:30] 2030 fund. And what that does, as you get closer to.

[00:10:34] Larry Heller: the actual 2030, it’ll, it’ll lower your allocation to equities to bonds each year automatically, because they know that you’re getting closer to that target date fund and then, you can keep that fund even if you’re still working there past 2030. so that’s a good option. we actually prefer something better than the target date funds because the target date funds, now you’re relying on whatever’s in that fund to make those, you know, make those choices for you and you may not want to be able to.

[00:11:07] Larry Heller: You know, to see what’s going on. So what we do is we create model portfolios, and we call them really, really simply anywhere from conservative to moderate, to growth, to aggressive growth. We have five different model portfolios that we’ve created and that we put in there and over. For all of the plans that we’ve done, we just did a study.

[00:11:30] Larry Heller: Over 70% of the participants in our plans select one of the model portfolios. Again, proven that most participants don’t understand and don’t want to do this. So what are you doing now in this model portfolio? Well, you’re kind of hiring us. Yeah, to really manage your investments inside your 401k plan. So what we do is we create the models, how much of allocation in each one of those funds, and we are looking at that, and then we’re evaluating all [00:12:00] those funds every quarter to see which ones should stay, which ones are on a watch list, which ones occasionally should be, should be replaced.

[00:12:08] Larry Heller: So you don’t have to worry about that. You just have to say, okay, I’m fine with a. Uh, growth fund. I’m fine with 60% in equities and 40% in fixed, and I’m gonna hire a firm to do that for, and selecting all the different choices in my 401k plan, to have somebody else do it for, for that. And I, I think that’s, you know, for, for the most part, that’s what’s proven that 70% want us to do that.

[00:12:37] Larry Heller: Uh, they want to have an expert actually reviewing their investments.

[00:12:40] Matt Halloran: Larry, oh my God. you just said the data, right? 70% of people are gonna take advantage of that. And I think that’s one of the things that happens in, uh, you know, people who provide 401k, they think that the plan participants know as much as they do as the 401k provider.

[00:12:56] Matt Halloran: And you just, you’re absolutely right. No, they don’t. We need to try to keep it as simple as possible and impactful as possible. ’cause we know that if people participate in their 4 0 1 Ks, their retention is better. They’re gonna feel better taken care of, and more importantly, they’re gonna be able to plan for retirement.

[00:13:13] Larry Heller: Absolutely. Of course there are people that wanna do it on their own. Sure. And you have, we have enough. Lineup choices and they feel free to feel free to do that and do that on, on their own. And I’m gonna mention one thing I wanna talk about a little bit more monetary and reviewing. So one of the things that we add to the [00:13:30] 401k lineup is what’s called the rebalancing.

[00:13:33] Larry Heller: Feature. So there’s, there’s a lot of cool different features that you can add to a 401k plan, and one of it is called the automatic rebalancing feature. So what, what does that mean? So, you can have your, you, you make all your selections. So let’s say you’re, you’re picking 10 funds to 10% each. The, obviously you’re not gonna do something that like that, but let’s say you’re doing that v and.

[00:13:56] Larry Heller: Most people don’t look at their 401k plan ever again once they’ve made their investment choices. So what happens over time? Well, some of those 10% may now have done great and they grow to 20% and they’re not making any changes. Well, when you have an automatic rebalancing function in the plan. Every so often it’ll go back to your original target.

[00:14:21] Larry Heller: So most of our plans, we, we have that feature, you can elect it as a participant, and we, we recommend to have it once a year, but you can actually have it set up that four times a year it gets re rebalanced. But it’s a great feature to have in your plans. And I, I, I really see almost all the plans that we take on don’t have that feature built in.

[00:14:43] Matt Halloran: Now one of the other things, and, and I don’t know if this adds a layer of complexity and I’m apologizing ahead of time if it does, but, but what happens if part of the 401k that the company wants to provide for their clients or for, I’m sure for their plan participants, for their employees and their team?

[00:14:58] Matt Halloran: Can there be a [00:15:00] company stock component to this? Because we don’t, we want our people to feel like they have some skin in the game and own some of the company in general.

[00:15:08] Larry Heller: Absolutely, especially, you know, big firms have that option in there and there’s been, you know, fortunately cases where people have put a hundred percent of their money in the company’s stock and have had on the upside may have had really good returns, but they’ve also experienced some major league corrections and loss.

[00:15:29] Larry Heller: all of it, or mo or most of it. So you just wanna be careful if you do have that option in there. If you wanna feel like you’re participating in the, in, in the company, uh, because you like the, what’s going on, that is an option in there. But again, you want to do it in moderation and w and make sure you’re diversified in your asset allocation is too, isn’t too much in something like, like that.

[00:15:51] Larry Heller: And ag again, if the company is doing well, then you’re may be doing well and you’re. Earning more money and maybe you don’t wanna have any company stock in there. um, you’ll get it on the, uh, on the outside.

[00:16:04] Matt Halloran: Alright, so one of the other things that we’ve talked about in through the part one and part two of this is really well the two major other sections that we need to cover.

[00:16:11] Matt Halloran: Uh, ’cause you already kind of talked a little bit about some of the monitoring and review stuff, but fees and expenses and participant education, you hinted towards participant education that you do annually for all of the people who have hired Heller Wealth Management for this. Let’s talk about fees and expenses.

[00:16:25] Matt Halloran: I don’t wanna spend too much time here because I know there’s so many ifs and buts and thens and [00:16:30] stuff. Uh, but, but what do you wanna say about, about monitoring the fees and expenses of a 401k?

[00:16:35] Larry Heller: Yeah. Every so often you should be benchmarking your plan and seeing what are you, what are you paying? For in your plan versus what your peers are paying for in your, in your plan.

[00:16:45] Larry Heller: Because fees have come down over years. So if you have an older plan, and there could be multiple layers of, of fees. There is record keeping fees, there are investment advisory fees, there’s TPA fees. And then Matt actually had one person, one time when I was talking to them, they actually said, we don’t pay anything for our 401k plan.

[00:17:07] Larry Heller: so, and the reason why they weren’t paying anything for their 401k paying ’cause they weren’t paying anything outside because the expense ratio of the fund was so high that the, the expense ratio was 2% in there. This is a while back that so they didn’t have to pay any other fees because it was coming outta the investment performance of everybody’s accounts.

[00:17:29] Larry Heller: So he was feeling, I’m not paying anything because he is. Literally not shelling out any money, but his investments aren’t making as much money. So you really need to look and understand all the different fees that you’re, that you’re paying in there. And they all the different, you know, some of the funds that I talked about have different classes and Siemens Act fund, but the classes are actually less expensive in there.

[00:17:56] Larry Heller: So sometimes a a fun family will come out with a lower expenses. They’re not [00:18:00] gonna knock on your door and say, Hey. You can change to this. So you need to be reviewing this, or you need to be having, or somebody reviewing it and benchmarking and see how those expenses compare to what else is out there.

[00:18:14] Larry Heller: I’m not saying that they always have to be the least expensive fund expenses out there, but they, you wanna see are they reasonable, are they, and how they match up to your peer group.

[00:18:24] Matt Halloran: Hmm. I am sorry. I just love the visualization of a fun company knocking at your door and saying,

[00:18:30] Matt Halloran: by the way, we lowered the fees.

[00:18:31] Matt Halloran: We don’t want you to pay us as much as you were paying previously.

[00:18:33] Larry Heller: Not, not gonna happen. So, and of course, that’s what I mentioned earlier about the lawsuits. That’s where a lot of these companies have been hit with these lawsuits. Big name companies that have been hit with these lawsuits because the attorneys now see that, hey, this is a, an opportunity to file a class action, and they’ve won a lot of these, a lot of these lawsuits.

[00:18:56] Larry Heller: So be careful and make sure that you’re reviewing your expenses on ongoing basis.

[00:19:01] Matt Halloran: Anything else in fees and expenses or you wanna move on to plan?

[00:19:04] Larry Heller: I think we’re fees and expenses. Let’s talk about participant. Yeah. Part education. And this is, you know, this is so important and you know, sometimes with owners and with companies, You know, they, they battle a little bit ’cause they don’t wanna have some of these education meetings for their participants. And, you know, I, I try to explain to them, it’s so important. It just makes them feel better and helps [00:19:30] retention to having these education meetings. So, um, you know, so we kind of go through a lot of different options on what.

[00:19:37] Larry Heller: You should be doing in these education meetings and how important it is to saving, and we, the biggest thing that we do when we do this is the word compounding and trying to get the younger people putting in a little bit each, you know, each year and making sure that they, you know, that they do that.

[00:19:55] Larry Heller: Sometimes I’ll go through and I’ll go through an exercise and I’ll ask somebody how much coffee that they buy each, and I said, if you gave up one of those coffees and you put that in here and compounding it over. 40 years how much it can be. It starts to open up their eyes a a little bit. uh, and we’ve had fun in some of these meetings.

[00:20:12] Larry Heller: A lot of times now, unfortunately, we’re doing a lot of these meetings, zoom, but I’ve actually walked into a, a, a meeting where so many participants were not taking care advantage of the match. And I threw money on the table. Oh, and, and I said, you guys are missing out on all this cash. It’s free money. And they’re not doing that to get the free, the free money.

[00:20:32] Larry Heller: So having the education meetings, but there’s even more to that. There’s online resources. You can go online and you can, this calculators how much you need to put away to reach certain amounts of money in retirement. Uh, I mean, a good plan will have all these type things and even emails, um, are, what we do is we send out education emails and it’s.

[00:20:52] Larry Heller: Geared towards their age, which is, I mean, technology is great, but now we know the age of all of the participants and [00:21:00] all of our plans. We make sure we get that and we put that in there. So monthly an email will go out and it’ll be specifically a different email to someone who’s 20 years old than someone who’s.

[00:21:10] Larry Heller: 60 years old because they have, you know, different stages of their lives. So making sure that you have the education and all that in there, it, it, it just, you know, it just helps. another part of the investment strategy.

[00:21:24] Matt Halloran: Bring it home, brother. Let’s, uh, go ahead and wrap up this a third and the four part series.

[00:21:28] Larry Heller: Again, you know, the investments and, you know, making sure that you, you know, have the right investments in there. Enough investments, not too many in there. Making sure the fees are reasonable, making sure that you’re providing the education for your employees and making sure that every so often you’re.

[00:21:44] Larry Heller: You’re benchmarking. We all, we offer a free benchmarking analysis for anyone out there so we can benchmark your plan against your peers to kind of show you what you have, what you’re missing, what some of the features that you have, and what some of the features that you, don’t have. So, uh, feel free anyone is, is interested, they can reach out to, to us directly on our website heller wealth management.com and, and schedule a, a call with myself or one of our advisors, or feel free to reach out to us at 6 3 1 2 4 8 3600.

[00:22:15] Matt Halloran: Well, Larry, thank you very much for another magnificent episode. Listen, uh, if you are a business owner or if you are a 401k participant in your three episodes into this four part mini series, and you realize that there are some things here that you would really like to bring to your organization, [00:22:30] or if you are the organization, please go ahead and reach out, on, website and the phone number that Larry just gave so that they can also have the opportunity to learn more about how they can participate more in a 401k maximize.

[00:22:42] Matt Halloran: Savings compound like Larry was saying, and also help you retain the highest and best employees. Alright, so for Larry, this is Matt Halloran and we’ll see you on the other side of the mic very soon.