Remember those investment consultants from the 1990s? They'd arrive all prim and proper into the 401(k) plan sponsors' conference room and slam a thick volume of solid paper on the table. They would then open their benchmark bible to the first chapter: numerology. In fact, every chapter was titled "Numerology" and, save for a few colorful pie charts, everything else was dry, black-and-white data. And the C-suite of sponsors smiled as if they understood.
They didn't. And that was maybe the ultimate objective of the consultant – make it so complicated they just couldn't fire you. Only you knew how to interpret the tea leaves of the 401(k) plan which the DOL held them – and, back then, for the most part, only them – accountable. They might not have known how to precisely measure their fiduciary liability, but these executives knew the word "liable" – and they didn't like it.
And while the consultants, and the financial products they were beholden to, bedazzled the plan sponsor with Modern Portfolio Theory mumbo-jumbo, the real liability lay hidden in an ocean of marketing literature and prospectuses that probably did actually disclose the existence of 12b-1 fees and revenue sharing kickbacks, but who reads all that stuff anyway.
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In a similar fashion, to reinforce the faux rocket science of it all, investment statistics consumed the bulk of the list of plan benchmarks. Investing is sexy, after all, and beyond the simple annual compliance testing regarding Highly Compensated Employees, why keep tabs on what the employees were doing? Wasn't the 401(k) designed to be the ultimate "do-it-yourselfer," placing all the onus on employees and removing that silly patrician thing going on with pension plans?
Well, a funny thing happened on the way to blissful ignorance – behavioral economics. Turns out, we could design plans so employees made better decisions. We had the technology to help employees increase the odds they would retire in comfort. And – guess what? – it had little to do with investments. Sure, the TDF snuck in right before the curtain came down on tables and tables of MPT statistics and ushered in an era of auto-this and auto-that.
These days, very few thought leaders still talk about investments when it comes to 401(k) plan benchmarks (see "'How-to' Guidelines to Follow When Creating 401(k) Plan Benchmarks," FiduciaryNews.com, January 27, 2015). The playbook is no longer coming from the finance department of your favorite quant school, but from the behavioral studies branch – and quite a few courtrooms.
The measure, and I use the term loosely here, of a good 401(k) plan benchmark relates to its ability to specify retirement readiness for each employee. Several leading service providers have quietly led this evolution away from the reams of figures published by your favorite neighborhood investment consultant and toward a one-page chart of leading indicators.
It used to be all about investment, asset allocation, and a cornucopia of Modern Portfolio Theory. Today, it's only about retirement readiness.
How many plan sponsors (let alone their service providers) are ready?
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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).
