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Thursday, June 04, 2015

A 401k Plan the Supreme Court Would Love

As we described in our previous post, the vast majority of 401k plans do exactly what the recent Supreme Court decision in Tibble V Edison Avoid_401k_Lawsuitsindicates you shouldn't do—condone higher-cost share classes on your actively-managed funds.  While you've likely been led there covertly by commissioned sales people (advisors), this case declares that you need to understand the concept and know the cost factors, because it's your problem, not theirs.

The entrenched providers, at best, will acknowledge that most plans “could use a little tweaking”.  But the reality is much harsher than that.  Most plans don’t just need a little tweaking.  They need a complete overhaul. 

The good news is that an overhaul is surprisingly easy to do and you can do more than just defend against high cost-related lawsuits when you do it.  There are several common compliance challenges in most plans as well.  And, if we can set aside the negative motivation (fear of legal action) for just a second, what if you really wanted your plan to be successful and you really sought to be a champion fiduciary?  Would everyone be in your plan?  Would they all be earning your match?  Would they be invested in low-cost funds that help them maximize their retirement savings?  Would they invest too conservatively and suffer negative returns after expenses and inflation?  Would they invest too aggressively for their own risk tolerance and then run when the market goes down?

With one overhaul; all these challenges can be addressed.  The focus needs to shift from defending your plan in court to actually helping every employee succeed at maximizing his retirement savings—removing any legitimate reason to even complain!

What does this plan look like?  One comprised of pre-built portfolios made up entirely of low-cost index funds and that reflect each participants’ risk tolerance and years to retirement.   The sponsor of such a plan will have made a very prudent decision to invest in low-cost funds to maximize his participants’ savings.  He will have structured the investments in such a way that choosing the appropriate portfolio was simple for participants.  Lastly, the sponsor has an easy story to tell participants—pick your portfolio and stay the course—investment education replaced with savings education. 

Now THAT’S a plan the SCOTUS would love! 


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Posted by at 1:37 PM