What is the Greatest Opportunity to Improve 401k Plans Today?
What is the greatest opportunity to improve 401(k) plans today?
We want as many employees as possible to get to higher account balances as soon as possible! Yep. It’s all about the money! Do you and your fellow employees deserve it? Absolutely you deserve it!
A majority of participants allocate their money poorly resulting in less return each year versus what they could have had. That results in less compounding. Repeating that lower return year after year – with the all-important compounding effect – and participants are left with ⅓ to ½ of what they could have had! Ouch! Just a 1-3% less return each year on average is devastating to the final balance at retirement.
So we need to improve the allocation of as many account owners as possible. How do we do that? Note, that by definition, 401(k) plan account owners have freedom to place or “allocate” their money in the plan options. Plans must offer “fund education” – but they are not required to offer “investment advice” – advice on how much to place in each fund for best results long term.
What’s the solution? I’ll give you two: the band-aid (quick) enhancement and the permanent enhancement.
Band-aid Enchancement: Hire a registered investment advisor become the ERISA Section 3(21) advisor to your current plan – who is licensed, willing and able to give investment advice. The investment advisor will help employees significantly improve the return versus employees left to their own devices. Most 401(k) plans have “shiny object funds” that at first glance sound good. An example is “Stable Value”. Stability sounds intriguing. What’s not to like? Well the growth is what’s not to like, not to mention their lack of transparency and other limitations. Guess who makes money on Stable Value funds – yes – of course the mutual fund companies selling them.
Many investment advisors will not take on this job – at least not permanently. There’s too much liability helping design portfolios with a hodge-podge selection of funds. My firm would only consider it with a firm commitment in writing from the company leadership to completely transform the plan within one year, which leads me to the “permanent fix”.
Permanent Enchancement: Transform the plan to an “investment advice based” plan. In these plans, registered investment advisors pick the funds for the plan sponsor and tell the participants how much to place into each fund. Great service!
To make it easy several pre-designed portfolios are built into the plan consisting of the same individual funds in the plan. Once employees realize that they can try to design it themselves, or use expert-designed portfolios – a very high percentage will choose the expert-designed portfolios.
Why reinvent the wheel?
Because the funds are more diversified and don’t overlap each other, even the very few that try their own design will achieve better results than they would have in an old school plan.
There you have it – once almost every participant has chosen an expert-designed portfolio – they are now achieving the returns available in the market – and their balances will compound at better rates leading to more in retirement. Problem solved! That was easy!
There’s a long list of other benefits to this type of plan. That is why “investment advice based plans” are rapidly increasing in number.
We will help you convert your plan so that you and all your co-workers can have a better retirement.