Is Your 401(k) Plan Successful for Your Company?

By Michael R. Smith

By just about any measure, the 401(k) industry has been a colossal failure for the employers and participants it should be serving. 

If you think about it, this shouldn’t be much of a surprise.  The majority of 401(k) “service providers”, regardless of their specific capacity, are in businesses that have one major goal:  to get assets under management so that they can derive “soft dollar” (read largely invisible) income from those assets.  Does that goal tie in with the creation and maintenance of a “successful” employee benefit program that is cost-efficient for employer and participants?  Well, the numbers say “no”.  Consider this:

·         Across all industries, plan participation is poor, with a third or more of all employees sitting out.

·         When we look at how participants invest, we find more disappointing numbers.  A third or more of plan assets are in a stable value or money market fund that barely keeps up with inflation.  And these are statistics from an EBRI study of large employer plans with knowledgeable, internal staff supporting them.  Smaller employers have no such staff and their numbers are far worse.

·         Of those who do invest in equity funds, we often see flight to stable value funds in a declining market – assuring that the participant will never recover his losses.

·         How about the low-cost index funds that most consumer advocates suggest?  They are not nearly as prevalent in plans as they should be, and when they are, they’re often loaded up with “wrap fees”.

Are you an employer who wants all employees to be in your plan, earning your match and actually maximizing their savings for retirement?  If so, would you say you have a successful plan?  Or, does it suffer from the maladies listed above?

What about cost?

Most employers, when asked about the cost of their plan, are unable to pin down a dollar amount.  They may have been told by a salesperson that, “with us, it’s free!”  Or, perhaps they were told that the investment funds in the plan pay all the cost.  Most employers know there’s a cost buried in the plan, they just don’t know what it is.

Imminent, new legislation will soon require plan “providers” to disclose the actual dollar cost of a plan to the plan sponsor (employer).  What a novel idea!  But what a shame it takes a regulation to make that happen.  And there’s a second “shoe” here too:  plan participants must be told exactly what they’re paying for their 401(k) account – in dollars.

As employers (and participants) learn the real cost of their plan – there should be a sea of shocked and angry folks out there.  You entrusted someone with finding you a great deal on an important part of your employee benefits offering – but it turns out the person who benefitted most was the advisor.  He was in control of most of the investment decisions, the applicable fund expenses were largely a mystery and his compensation component could be both maximized and hidden from view.  Not your best recipe for an economical plan.

If you’re an employee, you probably assumed your employer plan was the best place to save (and might have been told as much), only to find that it was costing more than your old IRA – particularly as your account balance grew.  How trusting will you be of your employer in the future?

A Successful Plan

What’s your definition of a successful plan?  For some employers, the definition of success could be minimal:  “I need to offer a 401(k) to compete for the people I need to succeed in my business, but if they don’t join or invest poorly, it makes no difference to me”.

Or perhaps your definition of a successful plan is more demanding:  “If my people aren’t in the plan, they don’t earn our match and they don’t have a retirement plan.  If they invest poorly, they waste their hard-earned dollars and they’ll have no chance to be comfortable in retirement.  I want every employee in the plan!”

Thanks to the new law, you’re about to learn what your plan is really costing you.  It’s safe to say, it will be much more costly than you thought.  It’s also safe to say that, with the proper advocate, your cost can be dramatically reduced.  But the first question you should ask yourself is, “what is our company’s definition of a successful plan?”   The answer will determine what services you’ll need and that will be the ultimate determinant of the right cost.  Here’s the good news:  Today’s plans are so bloated with inappropriate and unnecessary cost, no matter how lofty your definition of a successful plan may be, you can count on saving a small fortune.

Our firm is one of the few independent, fee-based advisors dedicated to helping our employer clients to identify and achieve their definition of a successful plan at the optimum cost.  Even with the new disclosure requirements, the insurance companies, investment firms and fund families are still finding ways to obscure the actual costs loaded in these plans.  We’ll make them clear – and then help you reduce them to where they should be – for your successful plan.