'Inside' Straits

 A recent Wall Street Journal (WSJ) article asked what I view as a rhetorical question; “Do you really know what’s inside your 401(k)?” Rhetorical in that I suspect the answer from most people — certainly if they’re honest — is “no.”

Now there are many aspects to a 401(k) that bear scrutiny, but the article was focused on target-date funds (TDFs) — a mechanism that I think has been a boon for most of the novice investors (and savers) that I suspect most 401(k) participants (still) are.

You check one box (heck, these days that box is checked for you) and tap into the expertise — and ongoing expertise at that — of professional money managers to provide your retirement savings with a diversified portfolio mix. No longer do you have to concern yourself with weightings of stocks and bonds, value versus growth, domestic versus international — just leave it to the experts. 

But the WSJ article’s focus was a cautionary note — mostly concerned at the unexpected things that a collective investment trust (CIT) vehicle (now 52% of all TDF assets, according to the article) might open the door to — specifically alternative investments, notably so-called “private investments.” Which, the article points out, might undermine the cost advantages of the CIT with those alternative holdings that are more expensive, less transparent/readily valued, and illiquid.

Indeed, the author goes so far as to comment, “As far as the managers of private assets are concerned, the ‘target’ in target-date funds is you.” Of course, his concern is that the less rigorous reporting requirements of a CIT (compared to a mutual fund) would allow investors to be taken advantage of — as though they’re actually even skimming that mutual fund prospectus.

Let’s face it — target-date funds with all their simplicity (at least in the choosing) and promise have been pitched as a “do it for you” solution, and tens of millions of (too) busy, preoccupied participants have trusted their retirement savings to these vehicles assuming that the professional investment class — not to mention the plan sponsor fiduciaries that screened them — know what they’re doing.

Unfortunately, in some cases, that trust may have been misplaced.

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Something not mentioned in the WSJ article is that most of the manufacturers of those vehicles several years back embraced a “through” retirement date glide path, rather than the “to” retirement date that was the original “pitch.” The latter meaning that you’d gradually move to a much more conservative asset mix at your projected retirement date. And while there is still certainly a modest shift in that direction, the shift in emphasis means that I suspect there are a lot of folks nearing retirement that have a portfolio mix that is significantly more exposed to stocks than they might expect and/or want.[i]

Some of this shift is, doubtless, a sense that individuals want to stay invested in those funds, irrespective of retirement date.[ii] Some doubtless a desire to report better returns, since I suspect most fiduciaries are (still) paying more attention to the current returns than the conceptual integrity of the glidepath.

Regardless, it is, to my eyes, anyway, a shift from the original premise — and one that I suspect many participants haven’t noticed, and one on which plan fiduciaries may not have focused. The inclusion of alternative investments (particularly when folks are talking about 20% allocations) is one thing — but the structural glide path of these options, particularly when positioned as a default investment, strikes me as even more fundamental.

That said, and as the WSJ article closes, “None of this means you should turn your back on these funds, which can give you a powerful boost toward a sustainable retirement. It does mean you’ll need to know what you own and speak up if you don’t like it. The ultimate hands-off investment is going to require you to be a lot more hands-on.”

I would say that goes double for those responsible for the selection and monitoring of these plan options.

• Nevin E. Adams, JD

 

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[i] Note — not saying that the shift in glidepath focus isn’t legit, or even beneficial — it just seems that most folks probably missed that “memo.”

[ii] Cynics might even suggest that the shift is a function of TDF managers simply wanting to keep hold of that money all the way through the individual’s retirement, rather than handing it over to a different manager. 

5 Fiduciary Resolutions for 2025

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 five for plan fiduciaries for 2025.

1. 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.

I expect that most, or at least many, plans also 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.

Let’s face it - when it comes to retirement plans, there often IS a direct link between spending less and saving more.

2. 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 nearly 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.  However, and once again – the Labor Department has suggested that action might be appropriate.

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 – oh, and there might now be a more personalized managed account option. 

The time to consider a change is before you are forced to do so.

3. 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 (likely even more with the new provisions in SECURE 2.0), one is inclined to assume that nearly two decades 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 year s— indeed the most recent PSCA survey found that half of the plans with automatic enrollment set the default deferral rate high enough so that participants receive the full possible company matching contribution (another 10% set it above that rate). More than a third now have a default rate of 6% - or higher!

4. 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 67th Annual Survey of Profit-Sharing and 401(k) plans notes that in 2023 that shifted to increasing financial literacy of employees — cited by 83.6%, and cited as the top priority for more than a third of survey respondents. 

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.”

5. Do your homework

Whether you lead a plan committee – or are “just” part of one – it’s important to be prepared.  ERISA requires that the named fiduciary (and there must be one of those) make decisions regarding the plan that are SOLELY in the best interests of plan participants and beneficiaries, and that are the types of decisions that a prudent expert would make about such matters.  Even if you (just) serve on a plan committee, you are also held to that standard.  Legally, you have personal financial responsibility for those decisions – and that motivation alone should provide the requisite focus on preparation. 

That said, ERISA does not require that you make those decisions by yourself—and, in fact, requires that, if you lack the requisite expertise, you enlist the support of those who do have it. 

But you’ll help them – and help yourself – and help the plan participants – if you do your homework BEFORE the committee meeting.

• Nevin E. Adams, JD

4 Fiduciary Resolutions for 2024

A brand new year awaits us – and with the New Year comes an opportunity to assess and reassess – for some when, resolutions for the cessation of bad behaviors and the beginning of better ones are in vogue. Here are some for plan fiduciaries for 2024 – that could benefit plan outcomes for years to come. 

See if your target-date options are over-weight(ed) 

 

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 – nearly all of which (despite marketing brochures to the contrary) appear to share very similar views as to what an appropriate glidepath is supposed to look like – and nearly all of which have embraced the notion that a target-date is little more than a speed bump along the “through” target-date glidepath. 

 

A target-date fund is, of course, a plan investment. 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). Particularly in view of recent market volatility, it’s worth (re)examining the asset allocations – and perhaps most significantly those that are applied to target dates that are near-term – and ask yourself – should an individual within five years of retirement have that much invested in those options?     

 

Look, 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 – and it’s probably (past) time you took a fresh look. 

 

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 change 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 that 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). 

 

With more than a couple of decades of experience under our belts (a third of that under the auspices of the Pension Protection Act of 2006), we know a couple of things. First, 3% isn’t “enough” (ironically, that is probably what accounts for its popularity – it’s small enough that it wasn’t thought to spur massive opt-outs by automatically enrolled participants). We also know (or should) that the auto-enrollment safe harbor of the PPA calls for a minimum starting deferral of 3%, which is a floor, not a ceiling. And finally, that – at least according to any number of industry surveys – a default contribution rate twice as high as the prevalent 3% would likely not trigger a big surge in opt-out rates. However, there is a great deal of difference in the retirement outcomes between the two. 

 

On an encouraging note, more than half of the respondents to the 66th Annual Survey of Profit-Sharing and 401(k) Plans now have an initial default contribution rate in excess of 3% - and nearly as many (27.6%) have a rate of 6% as do (29.2%). 

 

Give reenrolling a second thought 

 

There is a natural human tendency to apply change from a point in time forward, to apply a new approach in plan enrollment, like automatic enrollment only prospectively, to workers who join the company after the point in time at which it is effective, rather than retroactively. 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 applied. 

 

Regardless, don’t you owe them the same opportunity that you are giving your new hires? 

 

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.

- Nevin E. Adams, JD