1. Cut the costs. We can pretty much guarantee you that the plan costs you and your participants pay is way too much. Your advisor might tell you that he has reviewed it and it's "in line" with the industry. But he’s playing Scrooge in the Christmas play! He might quote the Department of Labor's contention that "401K costs are trending down." But even if that’s accurate, they have A LOT farther to fall; "reasonableness" shouldn’t be based on the collective failure of the industry. A typical 401K plan, comprised of actively managed funds, costs about 150 basis points on average. It can and should cost closer to 40. So is your cost really “reasonable” at 145?!
2. Dump the Actively-Managed Funds. Index funds outperform actively managed funds 80% of the time. Don't believe it? There are endless studies that prove it. Check out the latest Dalbar Study for a great set of numbers and charts. Why on earth would you subject your employees’ money to higher, non-productive cost? Actively managed funds outperform the index so infrequently (and the rare winners never repeat), the event could only be characterized as a Christmas miracle. Wouldn’t you rather tell employees that your plan helps them succeed by not subjecting them to false premises and excessive cost?
3. Use Pre-Built Portfolios. If you ask most employees how they feel about the choices they’ve made in their 401k plan, and how confident they are that they will have what they need to retire, you will find a lot of people who are lost with no hope. The Holidays and the New Year are the time for hope! But the startlingly simple answer to these woes begins with a plan of all model portfolios. This gets all your participants professional management of a portfolio that matches their goals. 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.
4. Invest in Savings Education. Investment education gives way to savings education—something everyone can understand. This is a gift worth giving! 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.
It’s highly likely that you can lower the cost of your plan by 50% or more and make it more successful for both your company and your employees. Do you still have actively-managed funds in your plan? Are you still hoping to turn employees/participants into investment pros? Do you have poor participation? Are your participants failing to save enough? Are participants exhibiting bad investment behavior with their accumulated savings? Only you know the answers to these questions. But if you answer “yes” to all (or most!) of them, it’s time to shop for a new plan for the New Year!
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.
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