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