Put your fund menu on a diet.
Though it is a point often made with jellies and ice cream, a long-standing behavioral finance tenet is that more choice doesn’t lead to better decisions. So what’s with those burgeoning 401(k) investment menus? Plan sponsors tend to offer more than 11 investment options in their DC plans, with 38% offering 11 to 15 options and 45% offering more than 16 options, according to the Rocaton/Pensions & Investments 2015 Survey of Defined Contribution Viewpoints study, which polled more than 400 plan sponsors and other industry professionals.
Odds are that you have funds on your menu that either aren’t being used or being used widely — options that contribute little other than clutter to your investment review and to the decisions of your participants. Take a look — your retirement plan menu shouldn’t be a kitchen sink “solution.”
If you don’t yet auto-enroll workers in your plan, it’s time to start.
There are a lot of reasons given to not initiate automatic enrollment: the notion that these are voluntary, not mandatory benefits; that you don’t want to be too paternalistic; that you don’t want to create a burden for someone who will then have to take steps to unenroll; or perhaps that most commonly cited concern — that by defaulting someone into the plan you will wind up with an angry employee darkening your door. It won’t.
Besides, how much time, energy and expense are you dedicating to the process of encouraging workers to enroll in the plan voluntarily?
If you do auto-enroll participants, raise the bar: Pump up that default to 6%, not 3%, of pay.
We all know that 3% isn’t “enough” to provide retirement security. That said, it remains the most common auto-enroll default rate, doubtless because it is the rate specifically stated in the Pension Protection Act (though it doesn’t prohibit a higher rate). Indeed, since the advent of the concept in the early 1980s, 3% has been the most typical rate, both because it was cited in an IRS example of the concept, and because it has been deemed low enough that it wouldn’t create a financial burden and/or a threshold high enough to warrant an opt-out on the part of the participant.But if you’ve been doing automatic enrollment for a while now, you’ve had a chance to shake out those adoption “bugs” and to get a feel for how it has affected your participation rate, your match dollars and employee morale. And even if you haven’t done automatic enrollment, why start with a default rate that you know is bound to come up short?
Surveys suggest that there is very little difference in participant opt-out rates between 3% and 6%. But there is a great deal of difference in the retirement outcomes between the two.
Give reenrolling a second thought — and your workers a second chance.
There is perhaps a natural human tendency to impose a new approach/regimen from a point in time forward, to apply a new approach in plan enrollment like automatic enrollment only prospectively, only to workers who join the company after the point in time at which it is effective. And sure, workers who have had their chance to enroll voluntarily may well, in their refusal to do so, have spoken their intent not to participate at a previous point in time.
However, that was then and this is now. If they don’t want to participate, it’s easy enough to opt out. But maybe they didn’t fill out that form the last time because they forgot to, because the investment menu was too complicated or intimidating, or maybe the valid reason(s) they had then no longer apply.
Regardless, don’t you owe them the same opportunity that you are giving your new hires?
Rethink the composition of your investment committee.
People find themselves on plan committees for any number of reasons, good and… not so good. Regardless, this shouldn’t be a position of “honor.” It should be reserved to those who have the knowledge to make sound fiduciary determinations, the courage to make tough choices and the discipline to keep a written record of those choices. They should do so with a full appreciation of the personal liability that comes with their role as a plan fiduciary and a commitment to not only prepare for these deliberations ahead of the committee meeting, but to take their participative role and attendance at these meetings seriously.
And if you don’t have an investment committee, you should resolve to fix that this year as well.
If you don’t know how much you’re paying for your retirement plan, find out.
As a plan fiduciary, you are expected to ensure that the plan pays no more than reasonable expenses for the services rendered to the plan. To do so, you must know the services rendered, who renders them, how they are rendered, and what fee(s) are paid for them. And then you have to decide if it’s reasonable. But if you don’t know the first part, you can’t determine the last. And if you can’t do that, you aren’t fulfilling your duties as a plan fiduciary.
And that could be trouble. For you, and the plan.
Unless you’re an expert in retirement plan design, fiduciary responsibility and investments, get help.
Nuff said. In fact, you might want to start here. It could make fulfilling those New Year’s Resolutions all the easier…
See also 6 Questions to Ask at Your Next Investment Committee Meeting.
- Nevin E. Adams, JD
