For all the talk about investment options as they pertain to 401(k) plans, beyond addressing the basics there's very little differentiation in the long-term impact of the choices. What does make a difference? According to a May 2014 report from the Putnam Institute, “…regardless of strategy, fund selection generated roughly the same amount of wealth.”
For years, advisers, plan sponsors and retirement savers have been led to believe in the preeminent importance of investment choices. Companies formed investment committees to listen to investment consultants as frequently as once a quarter. This was considered the “prudent” thing to do.
But was it? The Putnam Institute report is just one of the latest research papers belittling this idea. There's no practical difference between utilizing the wide variety of long-term investment options available. Is it really “prudent” to emphasize investment due diligence at the expense of other factors? Furthermore, to what extent is there a breach of fiduciary duty if those other factors have been shown to have a greater impact on achieving retirement success?
These questions have leading industry experts pondering—and doing something. Like other studies, the Putnam Institute offers this conclusion: “For many years, fund performance has taken center stage in the discussion of DC plan effectiveness and how to improve it. With the present study, we hope to shift the emphasis of that discussion to deferral rates—and the ways in which plan design and employee education can be leveraged to raise deferral rates for eligible participants.” But it is the loudness of actions that overshadow these words.
Regarding plan design, we're seeing a now almost universal use of auto-enrollment. This alone doesn't address the core issue, as the auto-enrollment deferral rate is generally well below the ideal deferral rate. That's why an increasing number of plan sponsors have also adopted auto-escalation. This automatically brings up the deferral rate to its target level.
The growing use of the “one-portfolio” single fund option (usually a target or risk-based fund) removes the onus of investment decision making from the shoulders of those who don't want that burden. Moreso, the latest and greatest Investment Policy Statements now categorize fund options not in investment-based tiers, but in behavior-based tiers (usually 3-4 ranging from “do-it-for-me” to “do-it-myself” employee personas).
This isn't to say plan-level investment advice and participant-level coaching is not important. It's still critical that plan sponsors conduct investment due diligence on the (decreasing number) of investment options offered to make sure they meet the long-term growth needs of their employees. This traditional investment adviser role will not disappear. On the other hand, at the participant level, we'll be seeing less investment “advice” and more lifestyle “coaching.” Given the frailties of human behavior, the temptation to buy high and sell low is best thwarted by a good coach.
Whether you're a plan level adviser or a participant coach, make the effort to put a spring into savings.
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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).
