The Markets October 9, 2007

Participants in Lifestyle Funds Outperform Do-it-Yourselfers

Participants investing in a single lifestyle, risk-based, fund had ending account balances that were 11% higher than those not using the funds over a 10-year period, according to a recent study by John Hancock.
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According to the study, this is the fifth consecutive year that lifestyle fund participants came out better than those 401(k) participants who picked their own investments.

John Hancock did a five-year and 10-year analysis on how lifestyle investors fared against non-lifestyle participants.

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In a five-year span, 80.9% of non-lifestyle participants would have garnered a higher ending balance if they invested in a single lifestyle portfolio that corresponded to their risk score; their average annual returns would have been 1.9% higher.

The 10-year analysis showed 84.2% of non-lifestyle participants would have accumulated a higher ending balance if they had invested in a single lifestyle portfolio that corresponded to their risk score; their average annual returns would have been 1.9% higher as well.

“This study proves that asset allocation works,” Bob Boyda, Senior Vice President of Investment Management Services, said in an interview. “No matter how you break the numbers down, lifestyle participants as a whole will always come out ahead of those picking their own investments.”

Broken down in terms of risk scores, lifestyle participant accounts outperformed non-lifestyle accounts in every risk category (conservative, moderate, balanced, growth and aggressive).

Boyda said the study showed that “John Hancock lifestyle participants had, as a group, an ending balance that was 11% higher than the non-lifestyle invested participants.’

The study was conducted by Burgess + Associates and looked at the performance of portfolios of 200,467 retirement plan participants for the five-year study and 14,487 plan participants for the 10-year study.

Compliance October 9, 2007

Is Something Wrong With a Plan? IRS Shares Common 401(k) Mistakes

The Internal Revenue Service (IRS) has released a list of the 11 most common mistakes made in the administration of 401(k) plans and how to correct or avoid those errors.
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The agency first uses a table to summarize the potential mistake, how to identify that mistake, how to correct that mistake, and how to avoid the mistake altogether. Each component of the table is linked to a more detailed explanation.

The 11 questions to ask are:

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  1. Has your plan document been updated within the past few years to reflect recent law changes?
  2. Are the plan’s operations based on the terms of the plan document?
  3. Is the plan’s definition of compensation for all deferrals and allocations used correctly?
  4. Were employer matching contributions made to all appropriate employees under the terms of the plan?
  5. Has your plan satisfied the nondiscrimination tests?
  6. Were all eligible employees identified and given the opportunity to make an elective deferral election?
  7. Are elective deferrals limited to the amounts under Internal Revenue Code section 402(g) for the calendar year? Have any excess deferrals been distributed?
  8. Have you timely deposited employee elective deferrals?
  9. If the plan was top-heavy, were the required minimum contributions made to the plan?
  10. Were hardship distributions made properly?
  11. Have you filed a Form 5500 series return and have you distributed a Summary Annual Report to all plan participants this year?

The full 43-page checklist and explanation from the IRS is here.

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