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Tuesday, July 29, 2014

Why We Love Index Funds (And All The Facts Say You Should, Too!)

Every day, we wake up, scratch our heads and ask, “Why do 401k plans still have actively-managed fundsWe_Love_Index_funds in them?!”  It’s common practice, we know.  We’ve heard all the arguments.  “We only use the best funds so your participants make higher returns;” or, “The service we provide is worth the higher cost of actively-managed funds;” or, “You need actively-managed funds in your plan for compliance reasons—you must offer enough choice to employees.”

The fact is, virtually no actively managed funds outperform their index with any regularity whatsoever. Decades of data and numerous empirical studies show that index funds, at approximately 1/5 the cost, outperform active funds about 80% of the time.  Not only that—recent studies show that when active advisors recommend changes in funds, plan costs increase and the new fund does worse than the one it replaced!  How could that be?  Think about it.  No one replaces a fund that’s doing well (so you are “selling low”) — and no one adds a fund that’s doing poorly (so you’re “buying high”).  Is that not exactly the opposite of what you’re supposed to do?  Is that not the very definition of “chasing returns”?

Your problem is that you have actively managed funds in your plan and you have an advisor that told you to include them (and now performs the diligent service of making periodic changes to find you better ones).  The data says that strategy fails with amazing frequency.  Everybody thinks their advisor is the exception to the data-proven rule, or you wouldn’t have him around.  But think about this: The fund your genius is telling you to buy….someone else’s genius is telling them to sell.

If you take the time to see how your actively-managed funds perform against their corresponding index, one of two things should happen: You dump your advisor and your active funds or you insist that your advisor start taking you on lavish vacations to Pebble Beach.  It’s important to ask yourself if the price you’re paying for these funds is REALLY buying you or your participants anything significant.  It’s even more important to get to the right answer.

Some plans are including index funds alongside active funds.  As the plan’s fiduciary, you should know that index funds regularly outperform active funds.  So why put options on the table that are proven to always be more costly and almost always return less?  Is your plan’s strategy to help participants get to a secure retirement or “Buyer Beware”?

What's your definition of a successful plan?  Great participation?  Low cost?  Helping employees maximize their retirement savings?  Preventing harmful participant decision-making?  Compliance?  Fiduciary excellence?  

The questions we pose in this blog are designed to get you thinking about where your plan is today, and where it might fall short of your own definition of success.  Click the button below to read our free whitepaper and get on the road to 401k plan success!

GET THE ESSENTIAL 401K WHITEPAPER!

Posted by 401K Revolt at 2:00 PM
Thursday, July 24, 2014

Saving In A 401k (So Simple Your Kids Could Do It!)

On Tuesday, we discussed the unfortunate truth about 401k education—you have to do it, but it has never really worked. 401k_Kids Employees are looking for a clear way to invest their hard-earned money that they can trust and understand.

But how to accomplish that?   All the big players have been flailing away at the problem for years with little to no success.  But let's face it, they're investment sellers, not educators.  And once they get the "low hanging fruit" in your plan, they are pretty much saying "mission accomplished."  But that's ok, for a successful plan, they need to go anyway.  

The startingly simple answer begins with a plan of all model portfolios. This gets all participants professional management of a portfolio that matches their needs.  The initial education task is then a simple one: how to pick the portfolio that makes sense for me.  This is a simple function of a risk questionnaire and years to retirement. 

Investment education gives way to savings education—something everyone can understand. 

The themes are simple:

  • Everyone should be in the plan
  • Start saving early
  • At all times of your life, save as much as you can
  • Pick a portfolio that fits your risk tolerance and years to retirement
  • Stay the course

Whether you’re 20 or 60, these basic goals are just as appropriate. 

Written materials, presentations and web-based education tools can now be greatly simplified and the vocabulary of investing largely abandoned.  The participant is not confronted with investments, buying, selling, re-balancing and investment toolboxes. How could that ever work?!  The basic message is “set it and forget it”—until your time horizon changes.

Employees will not be scared to join.  They’ll be confident they’re investing their hard-earned dollars in a way that makes sense for them and they’ll be inclined to set it and forget it.  And they may even see you as really helping them to maximize their retirement savings. 

You will see much improved participation, fewer compliance issues, more appreciative participants who are more capable of retiring, and retirees who will say nice things about the company in their community.

A plan that manages its investments and employee education components in this way has the best chance of being successful for employer and employee alike and it has been proven to work. 

What's your definition of a successful plan?  Great participation?  Low cost?  Helping employees maximize their retirement savings?  Preventing harmful participant decision-making?  Compliance?  Fiduciary excellence?  

The questions we pose in this blog are designed to get you thinking about where your plan is today, and where it might fall short of your own definition of success.

Click the button below to read our case study and see what great 401k education can accomplish!

DOWNLOAD THE CASE STUDY

 

Posted by Eric Kiesshauer at 11:30 AM
Tuesday, July 22, 2014

The Sad Truth About 401k Education

As a plan sponsor, you know you must provide a basic level of investment education to your 401k 401k_Education_Emptyparticipants.  If you have a “fiduciary checklist” to help keep you in compliance, this is going to be one of the items on that list.  While we acknowledge the value in such a checklist, we also strongly question what it really accomplishes for the folks in your plan.  Every day, we see evidence that “checking the boxes” for compliance doesn't mean that everything (or anything) going on in your plan is actually helping participants get to a more secure retirement.

Compliance and putting yourself in a defendable position in an audit (or worse, in court) is important.  Checklists and benchmarks help.  So yes, you should do it. 

But, let's say your real mission is to get people in the plan, saving as much as they can, earning your max match, investing wisely in a way that makes sense for them and thus maximizing their chances at an adequate or more comfortable retirement.  Is the education you're providing doing that? 

The most basic indicator of successful 401k education is participation.  The average 401k participation percentage is between 60-65%.  So whatever is passing for compliant education seems to leave a lot of folks cold - not even participating!

When you dig deeper into the behavior of those who do participate—how much they're saving, how they are invested and how they behave when the market changes—the impact of compliant education is called further into question.  How is it that what complies with the law, seems to have the exact opposite effect of what was intended?

So again, if the goal is for every employee to be in the plan maximizing his retirement savings, what is a plan sponsor to do? 

We don't think the answer is terribly elusive—but it's clear that the entrenched industry of 401k providers—from fund families to their commissioned sales people—are probably not going to deliver it.  If they were, everyone would certainly have it by now.  They've been at it for 30 years!

If more people are going to participate, they need a clear way to invest their hard-earned money that they can trust and understand.  Wading into an array of plan funds with "compliant education" is not that way.  They've been telling us they don't want education.  They've been telling us they want help.  They want guidance.  And here's the crazy part:  you can easily and inexpensively give it to them.  And when you're done, you'll still be able to check all the boxes on the checklist, but now your plan will really be helping participants, you'll be a more effective fiduciary, your costs will be lower and you will have a successful plan!

Come back on Thursday to learn more!  In the meantime, click the button below to download our free participation guide.

What's your definition of a successful plan?  Great participation?  Low cost?  Helping employees maximize their retirement savings?  Preventing harmful participant decision-making?  Compliance?  Fiduciary excellence?  

The questions we pose in this blog are designed to get you thinking about where your plan is today, and where it might fall short of your own definition of success.

401k Participation

Posted by Eric Kiesshauer at 3:32 PM
Thursday, July 17, 2014

3 Pre-Built 401k Portfolio Mistakes

Do you include "pre-built portfolios" (such as life cycle or target date funds) in your 401k plan?portfolio

Offering some is better than offering none.  Why? Because it's likely the only way that participants will get professional management of their savings.  Without it, they are wading into the plan's investment options - with only themselves as a guide.  While that is the norm, there is tons of evidence that shows that doesn't turn out well.

So while we love the idea of pre-built 401k portfolios, the make-up of those portfolios and how they are utilized is the difference between success and failure.

Mistake #1: Offering pre-built portfolios alongside other investments.  Doing this diminishes much of their value (because employees are still confronted with investments and the confusion that accompanies them).  While we know this is common practice, it is so damaging to participation, we deem it to be the number 1 mistake.

Mistake #2: Pre-built portfolios comprised of Actively-Managed Funds.  Actively-Managed Funds shouldn't be allowed in your pre-built portfolios because they rarely out-perform Passively-Managed funds yet they cost much more.  Very few employees know this, but as a plan sponsor or fiduciary, you should! A model portfolio (like any 401k plan) should include options that will help the participant maximize his savings.

Mistake #3: "Dog" funds in your pre-built portfolios.  If you took care of the Actively-Managed Funds problem above, this won't be an issue for you.  If not, beware the funds that your fund family or "advisor" used to create your pre-built portfolios.  Most include not only high cost funds but also funds that have not fared well in their own right.  In other words, the only way they will ever draw assets is to be lumped into a pre-built portfolio where their individual performance is hidden from scrutiny.

What's your definition of a successful plan?  Great participation?  Low cost?  Helping employees maximize their retirement savings?  Preventing harmful participant decision-making?  Compliance?  Fiduciary excellence?  Whatever it may be, a plan comprised entirely of well-conceived pre-built portfolios will get you closer than any other approach.

The questions we pose in this blog are designed to get you thinking about where your plan is today, and where it might fall short of your own definition of success.  To get a more comprehensive view of problem areas in your own plan, click the button below and do our free plan sponsor self-assessment.

TAKE THE 401K SELF ASSESSMENT!

Posted by 401K Revolt at 10:20 AM
Thursday, July 10, 2014

What is Your Definition of a Successful 401k Plan?

We believe this is the most fundamental question a plan sponsor needs to answer.  In fact, the 401k NailedRevolt was born as a result of this question. What should a 401k plan do for your organization, and what should it cost?

We find there are 3 basic definitions of 401k success among plan sponsors.

LOW: "We want a plan so that prospective employees can check it off their list.  We're not worried about who participates, how much they save or how they invest.  We want to spend as little as possible on our plan.  We offer little or no match."  

MIDDLE: "We want a plan that helps us attract and retain employees.  We want good enough participation to pass all the non-discrimination tests without having to limit what our higher-paid folks can put into the plan.  We want a plan that gives people lots of options. We want to provide decent education so that our participants can make good decisions but the responsibility is theirs.  We want a plan that is cost-efficient and we think ours is.  We offer a match."

HIGH: "We want a plan that helps us attract and retain employees and that helps them maximize their savings for retirement.  We want everyone in the plan, saving as much as they can and investing wisely, in a manner that matches their needs and risk tolerance.  We think employees want more than education—they want help saving effectively–and we'd like to provide that.  We want to keep expenses as low as possible—both for the company and participants–but we offer an attractive match."

The sole purpose of this blog is to get you thinking about what your company is hoping to accomplish with your plan.  The LOW definition of success is the most basic with minimal plan expectations.  The HIGH definition is at the other end of the spectrum with very high expectations for the plan.  Each philosophy is valid, though we must admit we are huge fans of the high definition!  Which philosophy do you have today?  What is your definition of a successful 401k plan?  What changes need to be made to get you there?  

 

Low participation got you down?  Click the button below to read our free 401k participation guide.

401k Participation

Posted by Eric Kiesshauer at 11:30 AM