401(k) Specialist Issue 2 - 2016 - 12

401(k) NEWS YOU CAN USE
Retirement Advisors Fail at
Tax-Efficient Investing: Russell
IT'S CLICHÉ, YET CRITICALLY IMPORTANT; investing is never
about what you earn, but what you keep. If returns are sacrificed on
the altar of tax-inefficiency, what's the point?
With that in mind come disturbing findings from Russell Investments.
The firm reports that more than half of advisors (53%) said
that clients saw a larger tax burden in 2014 than the prior year, yet
dialogue about tax strategies decreased in 2014.
The results of the latest " Financial Professional Outlook (FPO) "
survey of U.S. financial advisors found 22% say that taxes were
one of the most common conversation topics this year versus
29% in 2014.
Additionally, advisors have yet to align on tax strategy best
practices, with only about a quarter of advisors (27%) encouraging
clients to use tax-deferred strategies within their investment portfolios.
In general, opinions vary on the types of advice to provide,
as one in five advisors (19%) recommend implementing tax-loss
harvesting while 14% simply recommend paying the taxes.
" Given clients' increasing tax burdens, one would expect tax
strategies to be a major focus for advisors, " Frank Pape, director
of consulting in Russell Investments' U.S. advisor-sold business,
said in a statement.
" Right now,
many advisors and clients
don't fully appreciate the drag on returns
caused by taxes, which adds up quickly, especially in a low return
environment. Reducing this drag and providing clients with a more
complete plan for implementing a tax-managed approach is a significant
way for advisors to add value, not only to their own clients,
but also their businesses. "
Shock (Not): 401(k) Providers
Favor Proprietary Funds
401(K) PROVIDERS SHOULD PROBABLY HIT the " open architecture "
concept a little harder.
Invoking past (current?) controversies over whether or not
wirehouse advisors were pressured to sell proprietary products,
a soon-to-be published study in the Journal of Finance finds that
401(k) plan providers that also offer mutual funds include said
funds in plans they administer for no other reason than they can.
The benefit, of course, is the fees and resulting revenue they're able
to keep in house.
The paper, entitled " Are 401(k) Investment Menus Set Solely for
Plan Participants? " finds the following:
Mutual fund companies that are trustees of 401(k) plans must
serve plan participants' needs, but they also have an incentive to
promote their own funds.
The analysis suggests that these trustees tend to favor their own
funds, especially their poor-quality funds.
And 401(k) participants do not offset this bias by shifting their
12 ISSUE 2 2015 | 401kSpecialistmag.com
savings away from trustee-affiliated funds.
In short, fund companies serving as trustees often make
decisions that appear to adversely affect employees' retirement
security.
" On the one hand, fund companies are hired by plan sponsors-
and required by law-to create menus that serve the interests of
plan participants, " the authors note. " On the other hand, they also
have an incentive to include their own proprietary funds on the
menu, even when more suitable options are available from other
fund families. "
The differences in behavior with their own funds as opposed to
others is staggering, especially when ridding an investment menu
of poor performers. The authors report that mutual funds ranked in
the lowest decile based on their prior three-year performance have
a deletion rate of 25.5% per year if they are unaffiliated
with the plan's trustee and a deletion rate of just 13.7%
if they are affiliated with the trustee.
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401(k) Specialist Issue 2 - 2016

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