Join the 401K Revolt

Your path to a profoundly better 401k plan

Eric Kiesshauer

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Tuesday, September 16, 2014

Why Most Target Date Funds Are Off-Target

As a basic premise, every 401k plan should enable every participant to maximize retirement savings on his Custom_TDFsor her timetable.  To accomplish this, plan costs should always be kept as low as possible and each participant needs be able to invest in a way that reflects his personal risk tolerance, thereby growing his account at a level of risk that is comfortable for him.  Consistent returns are clearly important as well.

Every plan needs to either provide education that enables the participant to create an appropriate, personal portfolio and then manage that portfolio on an ongoing basis or, provide some "managed" option that does this for the participant.  Given the well-documented failure of investment education and the resultant, miserable participant decision-making and results, the target date fund (TDF) concept has emerged as a solution.  Many plans offer them and they are attracting more assets than ever.

The intention of “off-the shelf” Target Date Funds is good.  They’re professionally constructed and managed, they eliminate much of the need for investment education and the fruitless effort to turn plan participants into competent investors, and they encourage a set-it-and-forget-it mindset.  But they also come with a bag of problems. To name a few:

  1. High cost - either because of actively-managed funds, management fees or both

  2. Nearly always comprised of relatively poor-performing funds

  3. Don't take into account the individual's risk tolerance

  4. Don't get re-balanced frequently enough (usually only yearly)

  5. As a result of #3, it's more likely that participants with a low to moderate risk tolerance will "run" when the market goes down. (TDFs are too aggressive in the early years for these people)

Properly constructed, there should be no cons to a target date fund.  However, customization is key.  A great TDF: 

  1. Can be low cost - via low management fees and use of all index funds

  2. Can provide persistently better returns - index funds outperform actively-managed funds 80+% of the time

  3. Reflects both the individual's risk tolerance and the various time horizons

  4. Is professionally managed

  5. Is re-balanced quarterly

  6. Encourages a set-it-and-forget-it mindset

The most critical aspect of the "target date" concept is that, when offered in a front-and-center manner, (i.e., not as just another investment choice among many), employees are not repelled by the complex, incomprehensible and off-putting jargon of investments, so they join the plan. Not saving (non-participation) is the single biggest problem for employees, and non-participation is the biggest reason that plans fail their non-discrimination tests.  Using target date funds properly can solve these and other problems to make every 401k plan successful for employee and employer alike.

The bottom line is this:  the success of TDFs in your plan (meaning they achieve the basic plan premises cited above) depends entirely on who builds the custom funds and how they are deployed in the plan.



Posted by Eric Kiesshauer at 10:00 AM
Thursday, September 04, 2014

Take The Road Less Traveled: A New 401k

Every time I see a Fidelity commercial featuring their clever "green line", I think: Wizard of Oz.Where_does_the_red_brick_road_go  Recall the good witch and an enormous cast of Munchkins, enthusiastically advising Dorothy to "follow the yellow brick road" to find her way to the wizard in Emerald City and ultimately back to Kansas!  As we all know, she takes their advice and sets out on the arduous trek with great expectations.   She experiences lots of ups and downs, gets both good and bad advice along the way and even convinces three new friends to join her on the yellow brick road to "success".   After days of staying the course, fighting perils that range from a wicked witch to fierce flying monkeys, they finally arrive in Oz, meet The Wizard and get what they came for! 

Well, not exactly.

Dorothy and company quickly learn that if they really want what they came for, more is going to be required of them.  They will need to deliver the broomstick of the Wicked Witch of the West!  This is such a challenging task it almost doubles the length of the film.  Amazingly, they pull it off, and return to the wizard to have their wishes granted.  Sort of.  All Dorothy gets is an offer to "go for a ride" from a sketchy old wizard.  Her 3 friends get worthless trinkets and a pep talk.  Thank goodness for the ruby slippers, or we would have all gone to bed crying and never watched the movie again!

Fidelity's Green Line and the Yellow Brick Road have a lot in common.  They've both been proven, over many decades, to be lousy routes to the much-desired goal.  Like the YBR, just when you think your trip on the Green Line should be over, you'll find that you need to work quite a few more years to reach your destination.  Why?  Because all the studies on actively-managed funds (we could call them "green line pavers") show that at a cost of 5-10x the cost of index funds, they under-perform their index well over 80% of the time.  A one percent difference in cost alone will yield a nest egg that is 28% less over 30 years of saving.  Better figure on fetching the witch's broomstick before you retire.   

The Fidelity's of the world and the commissioned salesmen who recommend them are much like the good witch and the Munchkins:  well intentioned maybe, but really bad advisors.   And it gets worse:  The Munchkins really thought the YBR was the best way to help Dorothy.  All the advisors today have seen the “movie” many times over.  They all know that the Green Line isn't the best way to get to your goal.  The only ones succeeding via the Green Line are Fidelity and their commissioned sales people. 

Back in Kansas, the YBR is just a dream, but Fidelity's Green Line is a stark reality.  401k plans are loaded with high-cost, under-performing, actively-managed mutual funds.  Sadly, many participants have been traveling down their own version of the YBR for years and now that they should be nearing Oz, they find themselves far from their destination.  But now the good news: Ruby Slippers!  Fixing your 401k is almost as easy as clicking your heels together.  The Green Line off-ramp is just ahead.  It's time to re-set the GPS.  Tell Siri to give it another shot.  Find the answer to the most obvious question in the movie.  The one neither Glinda or the Munchkins ever mentioned:  Where does that other road take me?  



Posted by Eric Kiesshauer at 1:15 PM
Wednesday, August 13, 2014

High 401k Costs: Beating A Dead Horse?

We blog frequently about high 401k costs—and with all the other problems (and ready solutions) in these failing plans, I High_Cost_Blogsometimes worry that we talk about cost too much!  But then I'm reminded of yet another way that actively-managed funds over-charge and conceal what they are charging, or I analyze another plan, and my outrage (and sanity) returns.  If you think we overdo our rant on cost, please, please, take a closer look!   You and your participants are getting fleeced and there is no redeeming value for your overpayment.

When we do a cost analysis of plans and calculate what can be saved, we try to keep it simple and not overstate.  The easiest way to calculate the cost of a plan is to take the "total expense ratio" on each fund in the plan and then "weight" that cost based on how much money is in each fund.  Add to that any other costs that are billed to the plan sponsor or participants and you have a reasonable estimate of what the plan costs.  I can promise you this—this "reasonable" estimate is far more than you should be willing to pay.

But this calculation leaves out a very significant cost component.  The disclosed expense ratio does not include trading costs—the costs for buying and selling shares within an actively-managed fund. The more active a manager is in trading the underlying portfolio, the higher these costs will be.

I guess that plan sponsors with actively-managed funds in their plan would view some extra cost here as reasonable:  after all, you would be seething if your manager just sat on his butt all year!  But the irony is that for all that extra managing, studies prove that there is no correlating improvement in return.  In fact, the more managing and trading, the worse the return.

How much additional cost does trading expense add?   Generally between .09 and 1 percent.  On the high end, that nearly doubles the cost of the average actively-managed fund.  And keep in mind, active funds hardly ever beat their index!  All this trading and cost–and literally nothing to show for it.

Not moved by an extra 1% of cost?  Here's how it impacts savings:

A $7,200 investment growing by 7% each year will reach $14,163 after 10 years, before charges. A fund levying an annual charge of 1.55% would be worth $12,240 after 10 years, but a fund with an annual charge of 2.25% would be worth be $788 less, at $11,452, according to Lipper, the fund analysts.  Over 30 years, a 1% expense load depletes appreciation by roughly 28%.

Critics like to say that simplistic comparisons between the charges levied by actively-managed funds and index-tracking or passive funds miss the point.  That the two investment approaches incur different levels of cost, so the question is not whether stock-picking funds should be more expensive than index funds (they obviously are) but whether their higher charges are transparent and a fair reflection of the extra resources and effort involved.  This is nonsense.

The costs are not only non-transparent, they are hardly discoverable.  And what would "a fair reflection of the extra resources and effort" be? The simple reality is that actively-managed funds cost much more than index funds 100% of the time and they lose to their index more than 80% of the time.  That is a fair reflection.  Why would anyone knowingly pay that cost?  Why would any advisor instruct them to do so? 

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.  



Posted by Eric Kiesshauer at 10:38 AM
Tuesday, August 05, 2014

401k Fiduciary Responsibility, The Titanic and SEC Football

We often talk about the how "broken" the 401k industry is.  High cost, actively-managed funds, poor 401k_Fiduciaryparticipation, ineffective employee education, self-defeating employee decision-making—you name the category, 401k plans are failing everyone but the guys who sell them.

The most important responsibility the plan sponsor has is in his role as a fiduciary. It's the 401k fiduciary's responsibility to safeguard participants' assets.  Drop the ball on this responsibility and it could mean a DOL audit failure or an expensive lawsuit.  Plan sponsor awareness has become more acute as the audits and lawsuits have begun piling up.  So, predictably, the "plan sellers" tout their "fiduciary services"—sometimes even calling them warranties—to differentiate themselves in the sales process.  The bottom line is that these warranties are no such thing and sponsors should never rely on them.  Heck, Morgan Stanley just prevailed in a whistleblower suit by convincing a naive judge that they really had NO effective fiduciary responsibility.

So conventional wisdom says you should use the services of an independent fiduciary—and we reluctantly agree.  Why reluctantly?  Only because if you are truly watching out for your participants' money, you shouldn't really need the protection. But judging by the failure of today's 401ks, it appears that most plan sponsors are more focused on protecting themselves in court than they are on protecting their participants’ money. Obsessing about shifting fiduciary responsibility is like rearranging the deck chairs on the Titanic—the ship is still sinking. 

What constitutes a successful plan?   Everyone (not 65%) is in a low-cost plan, maximizing their savings, invested in a way that reflects their risk tolerance, staying put when the market goes down and maximizing their returns over the long haul. And yes, any successful plan must also be compliant. But there are no SEC (or any Division I) football teams devoting most of their energy to NCAA rules and losing every game. Because winning is the clear goal.  Compliance keeps you from vacating victories already won - a key element in success, but it doesn't make you successful.

If you have one of the handful of successful 401k's, it's not likely you'll ever have to defend your plan, let alone yourself.  Who would the plaintiff be?   Your participants would love you.  Fidelity, John Hancock or Merrill Lynch wouldn't like you (because you wouldn't be working with them) but they can't sue you for that, so who cares?  If you have one of the many failing plans (like most of those with the afore-mentioned firms) it would be wise to make sure you have an outside, independent, co-fiduciary as a partner.  It's far more likely you'll need it.

One final point to consider.  A failing plan that's in compliance is still a failing plan.  Are you doing your utmost for participants or not?  An outside, competent fiduciary could help you defend yourself but he can't make your plan successful.   As long as it's accepted fiduciary practice to say that bench-marking to a universe of failing plans is rational or having high-cost, actively managed funds is OK just because they outperform their index occasionally, participants (including you) will never receive the kind of fiduciary protection they deserve.  But at least the deck chairs will all be neatly aligned as the ship goes down.

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-see what fiduciary excellence can achieve!


Posted by Eric Kiesshauer at 10:00 AM
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!



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 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