A recent survey reveals the highest priorities of 401(k) plan sponsors. Here's a gift tailored exactly to their highest priority. When Deloitte Consulting asked 401(k) plan sponsors to rank eight hot topics, they might have been surprised by the results they received. Still, the respondents made their top choice quite clear (for the complete list, see "New Survey Reveals How 401(k) Plan Sponsors Rank 8 Hot Topics," FiduciaryNews.com, December 20, 2011). They didn't want what they been told is popular by the service providers, industry pundits and even some policy makers. Rather, they desired what all good fiduciaries want: to be able to help their beneficiaries achieve the goals of the trust.
In the case of 401(k) plans, this means helping employees do what needs to be done to achieve a comfortable retirement. Since their inception 30 years ago, with the reduction of the number of companies offering pension plans and the growing concern as to the long-term viability of Social Security, the 401(k) plan has become the go-to choice for those seeking a secure retirement. Although originally designed to only supplement the other two retirement vehicles, over the last two decades legislation increasing the 401(k) deferral maximum has made it easier for employees to rely solely on the one retirement vehicle they have the most control over: their 401(k) plan.
Of all the many issues facing 401(k) plan sponsors today, nothing compares to their desire to provide the right investments to help participants achieve retirement goals. This classic fiduciary duty has received scant little attention in the 401(k) media, so it's heartening to see plan sponsors remember their primary purpose without much prodding from journalists. That they rank this the highest of all hot issues, though, suggests they might be in need of a bigger library, or at least more time to read.
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There's been a large body of research, particularly in the area of behavioral finance, addressed the issue of trying to best help 401(k) investors (see "3 Ways 401(k) Plan Sponsors Can Help Employees Make Better Investment Decisions," "3 More Ways 401(k) Plan Sponsors Can Help Employees Make Better Investment Decisions" and "Avoiding Decision Paralysis: How to Create the Ideal 401(k) Plan Option Menu").
It would seem we could break done this wish into two components – what the 401(k) plan sponsor must do and what the 401(k) investor must do. The perfect gift for 401(k) plan sponsors would address both these components.
Let's first look at the latter – what 401(k) investors must do. They must save and they must save more. What can plan sponsors do to encourage this? This is the spirit of Christmas Past. As the book Nudge suggests, and since Congress passed the 2006 Pension Protection Act, plan sponsors can give employees the gift of automatic enrollment. Of course, it comes with some strings attached, but that brings us to the next gift, the perfect gift for 401(k) plan sponsors.
Part of the perfect gift exists right now, the other part has yet to be invented.
The part that exists today – the spirit of Christmas present – is the ability to design a menu option that both provides a wide variety of options yet relieves participants of much of the burden of decision making. This is the concept of a tiered menu where funds are grouped together into categories designed for different employee demographics. With this approach, employees must first decide in which broad category they belong before making investment selections. Furthermore, each category contains only a limited number of funds. Some categories will encourage employees to allocate among several funds, while other categories will direct employees to only one or maybe two funds. No longer will employees face the dilemma of too many choices. Of course, this requires a well-designed education program, but that's what all those 401(k) service providers are out there for, aren't they.
The second part of the perfect gift – the spirit of Christmas yet to come – isn't available right now, but each day brings us closer to its unveiling. Currently, the closest we come to experiencing this gift is through individualized investment advice. In the perfect world, this would be an affordable option for everyone. In the real world, it's not. For this reason, this future gift will consist of vehicles to both objectively help employees determine their needs (technically, this is a retirement calculator, but unlike any we see today) then map those needs to available investment options in a manner consistent with accepted research in behavior economics.
It's tough to define this perfect gift in 800 words, but if you can get in the proper spirit, improving the 401(k) won't scare the Dickens out of you.
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Christopher Carosa
Chris Carosa has been writing a weekly article and monthly column for BenefitsPRO online and BenefitsPRO Magazine since 2011 and is a nationally recognized award-winning writer, researcher and speaker. He’s written seven books, including From Cradle to Retire: The Child IRA; Hey! What’s My Number? – How to Increase the Odds You Will Retire in Comfort; A Pizza The Action: Everything I Ever Learned About Business I Learned By Working in a Pizza Stand at the Erie County Fair; and the widely acclaimed 401(k) Fiduciary Solutions. Carosa is also Chief Contributing Editor of the authoritative trade journal FiduciaryNews.com and publisher of the Mendon-Honeoye Falls-Lima Sentinel, a weekly community newspaper he founded in 1989. Currently serving as President of the National Society of Newspaper Columnists and with more than 1,000 articles published in various publications, he appears regularly in the national media. A “parallel” entrepreneur, he actively runs a handful of businesses, including a small boutique investment adviser, providing hands-on experience for his writing. A trained astrophysicist, he also holds an MBA and has been designated a Certified Trust and Financial Advisor. Share your thoughts and story ideas with him through Facebook (https://www.facebook.com/christophercarosa/)and Twitter (https://twitter.com/ChrisCarosa).
