5 New Year’s Resolutions for 401(k) Plan Fiduciaries

This is the time of year when resolutions for the cessation of bad behaviors and the beginning of better ones are in vogue. Here are three for plan fiduciaries for 2023.

Develop a plan budget.

Most financially-focused New Year’s Resolutions focus on spending (less) or saving (more)—and the really thoughtful ones do both—all tied around the development of a budget that aligns what we have to spend with what we actually spend. 

Most (many?) plans have a budget when it comes to the expenditures that require corporate funding.  Less clear is how many establish some kind of budget when it comes to what participants have to spend.  Now, granted, what they pay will vary based on any number of …variables—but an essential part of ensuring that the fees paid by the plan (for the services provided to the plan) is knowing how much—and for what. 

At some level that means not only keeping an eye on things like expense ratios, the options with revenue-sharing, and the availability of alternative share classes (or options like CITs)—but it also means having an awareness not only of the plan features, but the usage rates of those plan features.

Because when it comes to retirement plans, there often IS a direct link between spending less and saving more.

Put your fund menu on a diet.

Though it is a point often made with studies (well, one frequently cited study, actually) dealing 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 (still) burgeoning 401(k) investment menus? The 65^th annual Plan Sponsor Council of America’s Survey of Profit-Sharing and 401(k) Plans found that more than a quarter of plan sponsors offer 26 OR MORE options, while another 18% offered 21-25, and 27% offered 16-20.

Odds are that there are funds on the current menu that either aren’t being used or aren’t 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.”

Check-up—on your target-date fund(s).

Flows to target-date funds (TDF) have continued to be strong—and little wonder, what with their positioning as the qualified default investment alternative (QDIA) of choice for most 401(k)s. That said, the vast majority of those assets are still under the purview of an incredibly small number of firms—with glidepaths that are not as dissimilar as their marketing materials might suggest. 

A TDF is, of course, a plan investment, and like any plan investment, if it fails to pass muster, a plan fiduciary would certainly want to remedy that situation, including removing the fund if necessary (don’t take my word for it—that’s coming straight from the Labor Department).  

That said, TDFs are frequently, if not always, pitched (and likely bought) as a package. While each fund in the family is reviewed separately, and certainly should be, breaking up the set certainly carries with it a series of complicated consequences, not the least of which are participant communication issues and glide path compatibility. Not that those can’t be overcome—and not that those complications would be deemed sufficient to retain an inappropriate investment on the plan menu—but it doesn’t take much imagination to think about the heartburn that might cause.

The reasons cited behind TDF selection run a predictable gamut; price/fees, performance (past, of course, despite those disclaimers), platform (as in, it happens either to be their recordkeepers, or compatible with their program)—and doubtless some are actually doing so based on an objective evaluation of the TDF’s suitability for their plan and employee demographics. 

Whatever your rationale, it’s likely that things have changed—with the TDF’s designs, the markets, your plan, your workforce, or all of the above. 

Pump up the default rate in your auto-enrollment plan.

While a growing number of employers are auto-enrolling workers in their 401(k) plan, one is inclined to assume that, a decade and a half after the passage of the Pension Protection Act, if a plan hasn’t done so by now, they likely have some very specific reasons.

But for those who have already embraced automatic enrollment, those are plans who have (apparently) overcome the range of objections; concerns about paternalism, administrative issues, cost—some may even have heard that fixing problems with automatic enrollment can be—well, problematic (though things have gotten a little easier on that front).

There has been movement here over the years—indeed the most recent PSCA survey found that two-thirds (65%) of plans with automatic enrollment set the default deferral rate high enough so that participants receive the full possible company matching contribution, up from 57.1% as recently as 2020. In fact, the most common default rate for automatic enrollment plans is now more than 6%. 

Set goals for your plan designs.

The mantra about retirement benefits has always been that they exist to help attract and retain good workers. More recently, a reimagined emphasis on financial wellness has offered some nuance to that—to provide better levels of engagement while they are working, to forestall the “distractions” (and potential malfeasance) that financial stress can engender, and ultimately to help workers retire “on time.” These goals are not inherently incompatible, but at any given point in time they require differences in communication, education, emphasis, and potentially program design.  

There is, by the way, a sense of a shift in such things. While the primary goal of participant education has historically been to increase participation rates, the Plan Sponsor Council of America’s 65^th Annual Survey of Profit-Sharing and 401(k) plans notes that in 2020 that shifted to increasing financial literacy of employees in 2020—a shift that held in the most recent survey with 77.4% of organizations now stating that as their primary educational goal. The secondary goal was increasing appreciation for the plan (likely as a retention method) followed by providing retirement planning to employees. The percent of organizations offering financial wellness programs increased to 27%, including more than half of large employers.

If you haven’t revisited those objectives in a while—or, heaven forbid, have never done so—there’s no time like the present for a reset. After all, as Yogi Berra once commented, “If you don’t know where you’re going, you might wind up someplace else.” 

- Nevin E. Adams, JD

4 All Year Long ‘Resolutions’ for Plan Fiduciaries

This is the time of year when resolutions for the cessation of bad behaviors and the beginning of better ones are in vogue. Here are four for plan fiduciaries to keep in mind all year long.

Find your plan document(s) – and read them.

One of the key guiding principles for plan fiduciaries is something called the plan document rule, which says the fiduciary must follow the plan unless the terms of the plan contradict the rules of ERISA. So, first and foremost, I’m not sure how you follow the terms of the plan document if you haven’t read the plan document.

It’s incredibly easy in this hectic day and age for certain practices to take root and become part of “the way we’ve always done” things, and yet be at odds with the actual plan language.

Indeed, while a plan document isa legal document, and often uses language that seems designed to undermine a clear and practical application of its terms, I’m always amazed in my random queries to plan sponsors how many haven’t read it – or haven’t read it recently, though they nearly always have some idea as to where it has been stored for safekeeping.

Oh – and while you’ve got the document in hand, make sure that it’s been kept up to date. The laws do change, and – particularly if you’re relying on an individually designed plan – it’s easy to overlook the need to make changes to the legal document that governs your plan.

Make sure your target-date funds are (still) on target.

Still another guiding fiduciary principle is the diversification rule. This says that a fiduciary must ensure that the plan offers a wide range of investment options to help participants meet their investment needs and diversify their investments accordingly. And when it comes to such things, it’s hard to imagine a more apt focus than the default investment choice of the past decade – the target-date fund (TDF).

Sure enough, flows to target-date funds have continued to be strong – and little wonder, what with their positioning as the qualified default investment alternative (QDIA) of choice for most 401(k)s. That said, the vast majority of those assets are still under the purview of an incredibly small number of firms, though as recently as 2016, 3 of the 10 largest target-date managers experienced outflows for the year. According to Morningstar’s “2018 Target-Date Fund Landscape,” nearly 95% of the $70 billion estimated net flows to TDFs in 2017 went to target-date series that invest predominantly – i.e., at least 80% of assets – in index funds.

That said, the average target-date fund lost 4% last year through Dec. 10, according to Barron’s (citing Morningstar), while the S&P 500 is up just under 1%. In fact, not one of 664 target-date funds on the market, which together hold more than $1.1 trillion in assets, has had a positive return, according to Morningstar – though it’s the first time in a decade that target-date funds have posted widespread losses.

A target-date fund is, of course, a plan investment, and like any plan investment, if it fails to pass muster, a plan fiduciary would certainly want to remedy that situation, including removing the fund if necessary (don’t take my word for it – that’s coming straight from the Labor Department).

The reasons cited behind TDF selection run a predictable gamut; price/fees, performance (past, of course, despite those disclaimers), platform (as in, it happens either to be their recordkeepers, or compatible with their program) – and doubtless some are doing so based on an objective evaluation of the TDF’s suitability for their plan and employee demographics. Whatever your rationale, it’s likely that things have changed – with the TDF’s designs, the markets, your plan, your workforce, or all of the above.

Regardless, it’s probably time you took a fresh look.

Figure out what your plan costs.

Another of the key principles is the exclusive benefit rule, under which a fiduciary must operate the plan in a way that solely benefits participants and beneficiaries, and these days a key element of that has been paying only reasonable expenses for services rendered.

And while it’s perhaps not that unusual for plan fiduciaries to do an analysis at the plan level, this time it might be worth also picking a couple of representative individual accounts, and coming up with a dollar figure (rather than a basis point rendition) for what they are paying each year. Including your own.

Now, in order to do so, at an individual or plan level, you must of course know the services rendered, by whom and how they are rendered, and what fee(s) are paid for them. And then you have to decide if it’s reasonable (and while it’s often glossed over, not just the fees but the services).

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 the participants, for the plan – and, ultimately, for you.

Assess your expert-ise.

A final ERISA fiduciary principle is something generally referred to as the “prudent expert” rule, often labeled the highest duty known to law. It requires that a fiduciary perform its duties “with the care, skill, prudence and diligence under the circumstances then prevailing, that a prudent man acting in like capacity and familiar with such matters would use.” That rule is a standard of care, and when fiduciaries act for the exclusive purpose of providing benefits, they must do so at the level of a hypothetical knowledgeable person and must reach informed and reasoned decisions consistent with that standard.

The Department of Labor notes that “[l]acking that expertise, a fiduciary will want to hire someone with that professional knowledge to carry out the investment and other functions.”

In fact, you might want to start here. It could make fulfilling those other New Year’s Resolutions all the easier…

- Nevin E. Adams, JD

"Retirement Ready" Resolutions

As the New Year begins, we are often of a mind to think about making a fresh start. If you are an individual, you may (finally) be ready to be serious about saving for retirement - or you may have mailed in that last tuition check - or crossed that age 50 threshold where you can start "catching up" on retirement savings. If you're an employer, you may well have established new goals for your retirement plans this year—a new threshold for participation, perhaps—or maybe you’ve just rolled out a new fund menu for your participants.

But whether your plans - or your programs - have undergone change or not, this is a good time of year to help participants reexamine their savings goals—and perhaps even some of their “bad” retirement savings habits.

Here’s a short list of “resolutions” that can help you get started.

___ Resolve to participate in your workplace retirement savings plan.

If you are not already saving for your retirement in your workplace program, you are missing out on one of the most important—and easiest—ways of making sure that you are on track for a financially secure retirement. Unless, of course, you have a rich (old) uncle.

___ Resolve not to miss out on the company match.

Odds are your employer matches your contributions to your retirement savings account up to a certain level, say 5% of 6% of your pay. Whatever that level is, if you do not contribute up to that point, you are letting “free” money slip through your fingers.

___ Resolve to increase your savings rate in your workplace retirement savings plan by at least 1%.

If you are already saving, are you saving enough? Have you ever made an attempt—with some kind of planning tool or the assistance of a financial adviser—to figure out how much you will need? Even if you have, it is remarkably easy to increase your current rate of savings by as little 1%--and you might be surprised just how much difference that will make!

___ Resolve to consider rebalancing investments at least once this year.

Your retirement savings account is being rebalanced all the time—by the investment markets. You can start out the year with half of your account balance in stocks and the rest in bonds, and a month later find that 70% is now in stocks and just 30% in bonds, or the reverse. How much and how fast depends on how your balance is allocated, and what is happening in the market. The bottom line: Once you have taken the time to put together a thoughtful allocation, you need to keep an eye on things. Once a month is good, once a quarter is probably enough, and once a year—well, that’s a minimum. Try picking a day that you won’t forget—your birthday, an anniversary…. Or any three-day weekend.

___ Resolve to use target-date investments properly.

Target-date funds are a pre-mixed investment solution—and most are designed in such a way that they assume that you are investing all of your retirement savings in that one investment. If you mix and match that with other funds on your retirement savings menu—or split your savings between two (or more) target-date funds—you will probably wind up with a mess. Just pick one. It’s the basket you SHOULD put all your eggs into.

What would YOU add to this list?

- Nevin E. Adams, JD