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Wednesday, April 09, 2014

Is Your 401k Education Scaring Away Participants?

Every 401k provider, for 30+ years, has been relentlessly trying to make employees knowledgeable All_Ininvestors. For the exact same period of time, employees have been responding, by inaction: “we don’t want the job and we’re not going to learn it”! That’s the main reason they elect to stay out of their plans. Ironic, isn’t it?  

You may think you're helping your employees by offering this kind of investment education (often wrought with industry jargon), but in reality all it does is scare participants away.

So what kind of changes can you make in your 401k education to get participation up?  It starts with taking a long hard look at the investments in your plan.  Download our free 401k Participation Guide today!

401k Participation

Posted by 401K Revolt at 1:28 PM
Friday, April 04, 2014

4 Things About Target Date Funds that Plan Sponsors Should Avoid

Many 401k plans now include target date funds, which afford participants a much-needed opportunity to “settarget_date_funds it and forget it”.  In concept, this is a great idea.  Study after study shows that allocating your assets and letting them ride for the long haul (with periodic adjustments or rebalancing) is the best way to prepare for retirement.  However, while the core idea of TDF's is good, the typical execution is not. 

The best thing about TDF's is that they bring the element of professional investment management back into a plan.  This provides the participant with at least an option to have a professional manage his investment with a stated retirement date in mind.  TDF's have proven to be far superior to a participant building a portfolio from his plan's fund options (with or without the aid of an advisor!).  Unfortunately, there are several pitfalls that plague the average TDF and they are so significant that, as they are employed today, they may do more harm than good.

1. They do not measure the participant’s risk tolerance.  When a 401k plan participant selects a target date fund, she’s selecting a fund that reflects how many years she has until retirement, which is great.  However, the allocations in that fund may or may not match her tolerance for risk.  For example, a TDF with a far-off retirement date will be quite aggressive in the early years.   If this particular participant is more conservative, it’s likely that she will panic if there’s a dip in the market.  If she then moves her money to a more conservative choice, she's made a mistake from which she can never recover.

2. The underlying funds in a TDF are often "dogs".  Every fund family has some poor performers among their funds—2  or 3 star funds that would never be selected on their own merit.  TDF's are a common destination for such funds, because their individual performance is masked.  You can prove this for yourself by looking at each component fund and checking them out on Morningstar.

3. Cost.  TDF's, like the plans they live in, are heavily comprised of actively-managed funds.  There is no performance justification for the higher cost of actively-managed funds—let alone the typically higher cost for TDF's made up of such funds. 

4. Added confusion/negatively- affected participation.   TDFs are usually offered alongside other investments and thus positioned as just another investment.  So instead of simplifying the task for the participant, it becomes more complicated.  Employees consistently say they are confused by lots of investment choices.   In fact, studies show that they are actually repelled by investment choices and accompanying jargon.   Offering a TDF as another investment retards participation.  

The idea behind TDF's is great—professional management, set it and forget it.  But to be effective, a TDF needs to be the only type of investment in a plan and it should be comprised of low-cost index funds , which outperform their active counterparts more than 80% of the time.  Participants should choose their TDF based on both time horizon and their personal risk tolerance.   These little rules will result in:

  1. Much lower cost
  2. Much less confusion and thus much improved participation
  3. Better and more consistent returns on plan investments
  4. Participants invested in a way that makes sense for them and reflects their risk tolerance, so
  5. Improved participant investment behavior at every key decision point along the way.

Are any or all of these included in your definition of a successful plan?


Want to learn how your investment lineup affects participation in your 401k plan?  Check out our free Participation Guide!

401k Participation

Posted by 401K Revolt at 2:52 PM
Tuesday, April 01, 2014

5 Ways A 401K Fiduciary Gets Out-Foxed by Advisors


Articles about 401k plans now appear daily in every type of publication imaginable.  Even Cosmopolitan runs articles on what a woman should demand in..... her 401k?! 

As you might imagine, 401k Revolt is supportive of most such articles because each, in its own way, helps to identify the seemingly limitless shortcomings of this industry.  But while most articles do a good job of pointing out a problem area, they nearly always fall short on effective solutions.  They go to the entrenched sources—fund families, investment firms, insurance companies and commissioned investment sellers for the answers.   "Pardon me Mr. Fox but can you give us your ideas on what can be done to keep all these chickens from being eaten?"  And they get "answers" that are mired in the current, ineffective 401k delivery model.

The article linked here provides an excellent example.  It discusses a good, emerging idea, the Fee Policy Statement.   It shows that the plan sponsor is thinking about fees and has developed a policy to deal with them.  That's all good.  But then the entrenched providers are consulted:

One says, "Clients already understand the fees they're well as whether there are revenue-sharing arrangements".  Oh really?  We've yet to find one that really understands that.

Another says, "Advisers can help plan sponsors understand the options for paying expenses, be it writing a check, debiting participant accounts or using revenue share to offset fees..."   Excuse us, but there are only two options:  the employer pays or the participant pays.  Revenue sharing IS debiting participant accounts—just in a way that they can't see. 

Relying on the fox really cannot work because the fox is encumbered by one, undeniable urge:  he loves chickens and he will forever be eating them.  If your job is protecting chickens, and you take that job seriously, you will need to stop using the fox as your advisor.  Career chicken-eaters will suggest solutions that make you feel better but give them continued access to the chickens.  It's a survival instinct.

Here are just a few common "fox strategies":

  1. Use a Fee Policy Statement to explain "revenue sharing".   How to make a good idea bad.  Revenue sharing's only effective purpose is to conceal cost from the plan sponsor and/or the participant.  If the employer is not writing a check, the participant is paying the cost from his account.  The choice is to itemize the deduction and make it transparent or bury the cost via revenue sharing.  Revenue sharing is a stealth strategy of the fox.   Does the chicken know he's "sharing his revenue"?

  2. Benchmark your fees.  Against what?  The high fees the industry is charging every other plan?  This accomplishes two things:  It enables you to prove you looked at your cost (good).  And it will justify the "duty"  the chickens are paying the fox.

  3. Benchmark your returns.  Again, against what?  Past performance of other funds?  Lipper averages?  Other actively-managed funds?  Other than being able to show you did some superficial due diligence, which helps the plan sponsor defend his high-cost funds (and thus the fox), this will do nothing to help the chickens.

  4. Complete a fiduciary checklist.  By all means, do this.  But understand, the checklist is a defensive weapon for you as the plan sponsor.  You'll be able to check the boxes on the activities above too.  But all the while, the fox will still have access and the chickens will continue to be adversely affected.

  5. Provide investment education.  How could we possibly quarrel with this one?  Because every study and every metric shows that it doesn't work.  Participants are repelled by investments and investment talk.  Providing off-the-shelf materials and jargon-filled meetings may justify fees but they do little or nothing to improve participation, deferrals or investment behavior.  From 2001 to 2011, 401k participation slightly declined.  That's a good measure of the cumulative effect of investment education.

So here's the take-away.  401k's are broken.  That, most likely, includes yours.  If your goals as a 401k fiduciary include minimizing cost and maximizing your participants' retirement security you will need to turn away from the fox as an advisor.  If he works for a big name firm, assume he's a fox.   Take heart that there are a few revolutionary chicken lovers (advocates, not carnivores) who can and will help you protect your chickens from the fox.  But first, you have to face the fact that the fox is not your friend.

Want to see what happens when some of those revolutionary chicken lovers get ahold of your plan?


Posted by 401K Revolt at 9:22 AM