• Brian Allen, CFP®

401(k) Plan Committees Often Hold the Key to Americans’ Retirement Readiness

401(k) plan committee members are virtually never in the limelight but they play a critical role.



Here is an article I wrote for The Street’s Retirement Daily column with Robert Powell, CFP®. I highlight the 401(k) plan committee role and how important these fiduciaries are to building rewarding retirement for their people. This article was originally published on The Street’s website on January 25, 2021 and can be viewed here.


__________



At critical times in our lives, we count on others.


When we have health issues, we rely on medical professionals to take care of us. In emergencies, we depend on police, firefighters, and other first responders. Legal issues? We look for a good attorney.


Time after time, we trust those whose jobs are to put us first. These are the people who keep us healthy, safe, and secure.


In terms of financial security, many Americans rely on 401(k) plans to help fund their retirement. And essentially, they are counting on people who serve on plan committees to do their job well.


It’s not an easy job. 401(k) plan committee members are virtually never in the limelight but nonetheless play a critical role. Across the nation, at companies small and large, many individuals serve on committees that oversee the plans on which many Americans today base their retirement dreams. The vigilance of those committees is critical in this post-pension era, when employees must determine how much to accumulate for their retirement and try their hand at the investments that companies once undertook on their behalf.


The mission of these plan committee members is to be a true fiduciary and look out solely for the best interests of their colleagues, who tuck away their hard-earned pay week after week, year after year. Committee members have been entrusted to help provide employees with a good plan, one that successfully prepares them for retirement.


Serving on a fiduciary committee is a sobering responsibility. Their co-workers are counting on their good judgment and skills to ensure retirement success. Committee members are supposed to be advocates for their fellow employees, and it is their duty and privilege to remain vigilant and to speak up on their colleagues’ behalf during meetings.


If the committee does a poor job, people will get hurt financially. Much industry news has focused on what those hurt people do to get even, and the media have been quick to report on a flood of litigation.


As a result, many fiduciary committees take a protective stance rather than a progressive one. When they meet, they devote much of their time to the topic of how to fend off lawsuits – an understandable perspective, perhaps, but unfortunate. Think of it this way: Would you want your doctor to focus on how to keep you in the best of health or on whatever it takes to keep you from filing a lawsuit? The latter is not most people’s idea of preventive medicine.


But if a plan committee does its job well, people will benefit in many ways. By helping individuals – and by extension their families – with retirement, committee members are also helping to improve communities, which builds a better nation. It also helps companies, as employees who are relieved of financial stress are better able to perform at their best. That puts employees in position to earn more and makes their company more productive.


And when older employees retire on time, organizations can bring in younger workers with fresh ideas at lower pay who are likely to stick around because they see advancement opportunities.


Is Your Committee Competent?


As committee members oversee the management of the plan, the decisions they make will impact its expenses and the investment choices offered. The service providers they choose will have much to do with how well or how poorly the plan is run.


Remember that I said being a 401(k) plan committee member/fiduciary is a sobering responsibility? Well, here’s a sobering truth: Based upon what I have seen, fiduciary committee members typically are no more knowledgeable about investments than the population in general.


While some committee members may have a solid financial background, many 401(k) plan committee members feel as if they are in over their heads. The legal and investment lingo can feel intimidating to the uninitiated, and partly as a result, not all plans are managed well.


Many plans earn insufficient returns, cost more, and generally do not prepare employees well for retirement. The troubling truth is that plan fiduciaries often lack the information they need to even know whether their plan is good. That lack of quality and clarity is commonplace. Because the industry has not developed objective performance standards, serious problems can go unrecognized and unaddressed. As a result, investment lineups very often fail to perform as well as the indexes that reflect how well the markets in general are doing.


What does a good plan look like?


So how do committees with these kinds of confused members know whether a plan is a good one for the employees? Here are the three key elements of a good plan:


1) The plan’s investment lineup performs well. A small gain in investment performance compounded over a plan participant’s working career will have a tremendous impact on how much money will be available at retirement age.


2) The total fees paid by the plan are low. The fees that participants must pay via the plan’s expenses come right off the top of their earnings. Think of fees as a negative investment return. They sap the strength of the compounding effect. Just as a small gain in the percentage of return will boost retirement assets dramatically, a small drop in the percentage of return will reduce them dramatically.


3) The total contributions are at an appropriate level. As people scurry about their daily lives, they often neglect to think about how much they are setting aside for retirement. They fall victim to “short-termism,” which has become a popular term for the phenomenon of focusing primarily on one’s current needs and wants to the detriment of future concerns. No matter how stellar the performance of a plan, no matter how low the fees, no matter how generous the employer’s match, nobody can successfully prepare for retirement without contributing regularly into their retirement account.


Most people don’t know how much they should be contributing. A good plan keeps track of how well its participants are contributing to the plan to be on pace to retire comfortably.


Millions of workers and their families are counting on 401(k) committees to manage their retirement funds responsibly. It’s a role that can’t be understated. Committee members are in a position to positively impact a lot of people for the most rewarding years of their lives.


But on the flip side, members who aren’t up to speed can contribute to delaying many retirements.


If you found this article helpful, I share more insights and how-tos for retirement plan committee members in my book, Rewarding Retirement: How Fiduciary Committees Can Elevate Workers, Companies, And Communities. Order your copy now!