401(k): From possible to probable, from reasonable to competitive
For this article to make sense to the reader, two foundational ideas must be accepted. One is that lower fees lead to better returns in the plan. Two is that investment advice leads to more diversification and better returns. Both are well established in the literature. A number of our blog posts address these important foundational ideas.
Not convinced? Click here for a summary of how the Lost Decade hurt those whose investments were concentrated in the S&P 500 Index. This example is perfect for 401(k) plan participants because many participants will place most of their money in large cap US funds because they “understand” these well known companies. 401(k) plans got their largest black eye ever during the Lost Decade. Click here for our blog on the Morningstar report document the relationship between fees and performance. I assure you – this is just the beginning of the proof. Please contact us if you wish to receive more information.
The status quo says that if your plan has “reasonable” fees and the fund selection inside the plan “make it possible” for an employee in the plan to have their money in a reasonably diversified portfolio – then you’re meeting basic requirements.. 401(k) plans are based on giving employees freedom to spread their money around the funds as they wish – even if they do it in such a way as to torpedo their returns. Though that seems wrong to us – it is the current situation.
We want to make it likely that our beloved employees/co-workers precious retirement assets grow as well as possible – directly impacting the quality of the last phase of their life.
So, let’s take our level of care up a notch!
In our view plans should have “competitively low fees” (not just reasonable) and the plan should “make it probable” (not just possible) that an employee in the plan has a reasonable portfolio and therefore experiences solid growth.
Great news: No additional effort is required to achieve this improvement! With more employees holding a reasonable portfolio, average returns will be higher, increasing the employees’ quality of life in retirement. The overall plan will grow more quickly and in this new and improved plan, fees as a percentage also drop as the plan grows.
Moving your plan to these higher standards significantly improves a core company benefit by delivering a better 401(k) experience and improving employee retention.
So, how to get started? Our first step: a brief 45-minute meeting with you so we can hear your concerns and desires regarding your company’s 401(k) plan. We’ll also demonstrate how a 401(k) works with a fun and educational “card game”. If there are people on your team that would benefit from knowing more, you can invite them.