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The Cadillac of 401(k)s belongs to GM
General Motors' business may be stressed, but the auto giant's 401(k) plan is cheap and smart. In fact, workers should pressure their bosses to emulate it.
By Timothy Middleton
General Motors bonds may be junk, but the auto giant's 401(k) retirement plan is platinum.
Armed with an array of low-cost, high-quality investment options, General Motors (GM, news, msgs) employees can earn tens of thousands of dollars more in investment returns over a working career than the typical 401(k) investor.
"My objective is a dual thing -- to keep my expenses at a minimum, with the best returns possible," says Patrick Montgomery, who retired from GM in 2000 and moved to a golfing community in Lady Lakes, Fla.
He accomplished both goals with one choice: institutional investment accounts. While 401(k) plans typically offer an array of mutual funds that anyone can buy, a little-known fact is that the funds add huge costs that could be easily avoided if more companies, like GM, offered the same types of low-cost institutional funds.
Montgomery also wisely shunned GM stock, which has tumbled more than 50% since he left Detroit. "Can you imagine if I had half of my retirement fund wrapped up with them?" Montgomery says.
Montgomery's experience, while a good example of how 401(k) plans can work for individuals, contrasts sharply with the experience of many workers. The 401(k) plan, which replaced the traditional defined-benefit pension at most companies, is failing workers because of an array of problems, including high costs, inadequate options and poor performance.
The issue is underscored by the debate over reforming Social Security, which may mean that individuals are given even more responsibility for their own financial well-being in retirement.
Those problems have been the subject of several of my articles in recent months. This report, the fourth in the series, again points out the system's failings by highlighting one of the few plans that do things the right way.
GM's 401(k): The nuts and bolts
General Motors groups the 401(k) plans it offers to blue- and white-collar workers into the General Motors Savings Plan Master Trust. It had total assets of $21.49 billion at the end of 2003. These data are drawn from the company's public filings with the Securities and Exchange Commission and the U.S. Department of Labor. The Labor Department filings are available online at freeErisa.com.
The 401(k) plan for hourly workers is one of the biggest components of the plan, with assets of $8.11 billion. Like the other GM plans, it offers three distinct investment options.
An easy way out of company stock
The first is company stock, which accounts for 19.3% of the Master Trust's assets. This is also the currency GM uses to match employee contributions. The match varies: Union members get no match, while management gets a 25% match for the first 6% of a salary contributed to the plan.
(That may sound like a bad deal for union members, but it's not. In addition to being eligible for the 401(k), union members receive a traditional pension as part of their benefits. Many of the salaried managers who receive a 401(k) match do not receive such pension benefits.)
More on mutual funds
Unlike plans that require company stock be held for years, "GM does it the way you want," says Michael Scarborough, a financial adviser in Annapolis, Md. "If a match is given to you in a calendar year, any time in the next calendar year you can move all of that money."
Most plans that include company stock as an option have 40% to 50% of assets in that stock, which is excessive. I personally would recommend that 401(k) investors keep company stock well below 20%, since their livelihood already depends on the company.
A different type of fund option
The second choice is an array of more than 40 brand-name mutual funds, which collectively attract 30.1% of plan assets. These are mostly -- but not exclusively -- funds from Fidelity Investments. They include such well-known names as Fidelity Equity-Income (FEQIX), Fidelity Contrafund (FCNTX) and Fidelity Real Estate Investment (FRESX).
The third choice is the cheapest, the best and the most popular. These are institutional portfolios that carry the Promark name. The portfolios are managed by a GM subsidiary, General Motors Asset Management, which also manages the automaker's traditional, defined-benefit pension plan. These portfolios attract half of the plan's total assets, charge expenses significantly lower than those of the mutual funds and also outperform them.
When outsourcing is a good thing
Promark funds are managed by teams, with GMAM running about 15% of each portfolio and hiring as many as 75 outside managers to invest the balance. Outside firms include some of the best names in money management, including Pacific Investment Management Co. (PIMCO), Sanford C. Bernstein and Capital Guardian, part of the Capital Group, which runs the American Funds.
"Our job is to manage the quality of the investment managers and the type of risk that we're taking in these funds," says Allen Reed, GMAM's chief executive.
The 14 Promark funds are described at its Web site. They cover the gamut of investment options, including such key portfolio diversifiers as high-yield domestic bonds and emerging-markets stocks.
Beating Fidelity, head to head
How cheap is cheap? Very.
Fidelity Equity-Income, for example, has an expense ratio of 0.69% -- less than half the industry average of 1.5%. But fund expense ratios don't account for the full range of costs that investors actually pay, notably commissions on stock trading. According to PersonalFund.com, an expense calculator that culls these hidden expenses from regulatory filings, the actual expenses at Fidelity Equity-Income are 1.04% annually.
Promark Large Cap Value Fund (because they're not mutual funds, they don't have ticker symbols) charged 0.67% in total expenses, including trading costs, for the 12 months ended March 31. Assuming equal money-management skills on both sides, the Promark fund should outperform the Fidelity fund just because its expenses are 37 basis points, or 0.37 percentage points, less.
In fact, the Promark fund has bettered the return of the Fidelity fund an average of 117 basis points in each of the last five years, according to Scarborough's advisory firm, Scarborough Group. It returned 5.59% in each of those years compared to Fidelity's 4.42%, according to Scarborough's calculations.
Promark is an outstanding money manager. Scarborough did an analysis of the performance of the Promark and brand-name funds in the GM plan as of March 31. In the 11 style categories in which the two compete head-to-head, such as large value and high-quality bonds, Promark had the better performer nine times in the most recent 12 months. Over the past three and five years, Promark's entry delivered higher returns in eight of the 11 categories.
Scarborough Group specializes in advising 401(k) participants on their investments, charging $365 a year for customized advice. It counts more than 3,000 current and former GM employees among its clients.
Most employees "have no clue" about investing, Scarborough says. Montgomery, a client since the early 1990s, attributes what he knows to his adviser. He credits Scarborough with guiding him away from company stock and brand-name mutual funds and into the Promark funds, beginning nearly 15 years ago.
GM is one of the nation's largest companies, but most mid-size to large employers could shift to Promark-style funds; indeed, GMAM markets the funds to other 401(k) plans and has $20 billion in non-GM assets.
Tallying up the savings
Employers who rely heavily on brand-name mutual funds in their plans are making a mistake and could someday face lawsuits over gouging their workers for unnecessary fees. Institutional money managers like GMAM charge 30% less than even low-cost mutual funds like Fidelity's, and a half to a quarter as much as high-cost funds.
As I reported last month, the plan Bank of America (BAC, news, msgs) offers its own employees uses high-cost investment options and had expenses in 2003 of roughly $8 million. Total expenses of the GM plan for hourly workers, which is 10% larger, were just $1.4 million.
The difference of more than $6.5 million fueled fat paychecks for middlemen at Bank of America. At GM, it went directly into the retirement accounts of its employees.
If your 401(k) or 403(b) nest egg has taken a beating in recent years, send me a note at middletonsh@yahoo.com. I would like to expose the punishment that thoughtless, even mendacious employers are inflicting on their workers.
At the time of publication, Timothy Middleton owned or controlled the following security mentioned in this article: Fidelity Contrafund.
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