Brian Allen, CFP®
Committees Must Manage 401(k) Plans Better: Here’s How
With the majority of working Americans behind in retirement savings, managing and growing money reserves is a concern in many households. While 401(k) plans offered through employers remain popular investment vehicles toward retirement, experts note that several factors are out of the employee’s control. Perhaps the biggest questions regard the human factors: who is calling the shots for your company 401(k) plan, and are they making good choices with your money?
Workers are not being put on track to retire on time with dignity, and this issue must be addressed. Plan committee members often lack training and knowledge, and committees usually judge the efficacy of their advisers on personality or brand, not objective performance. Fund selection decisions often amount to getting in high, pulling out low, and repeating. That’s common among retirement plan advisers and the fiduciary committees that hire them. It’s not exactly an effective way to enhance the performance for the plan participants. Most advisers simply aren’t very good at fund selection. In order for 401(k) plans to prepare workers to retire on time, company retirement plan committees need to be up to speed in these areas:
Know how to judge the investment lineup and advisers. The return made on an investment compounds powerfully over time, and since helping the participants accumulate enough money for a secure retirement is the ultimate objective of the plan, investment performance must be addressed. You can be confident that your plan’s investment menu is performing well when it outperforms an all-index lineup. Knowing this empowers committees to judge the performance of those who advise in this important area.
Select a fund for each asset class. An asset class is a grouping of investments like equities, bonds, commodities, real estate, etc. After selecting the asset classes, you need a benchmark for each in order to provide a basis to judge their performance. The committee selects a manager – not a person, but rather, a fund – that will outperform the benchmark over time. When selecting a fund manager, the committee should choose a company with these characteristics: a deep research staff, a concentration of portfolio holdings, and relatively low expenses. They will rely heavily on the plan adviser, who should use various metrics, attributes, and experience.
Track the performance of all funds ever in the plan. Poor performance can be concealed by a newly added fund with stronger results. When the plan adviser changes one of the funds in the lineup, or suggests a change, it’s often the result of poor fund performance relative to its benchmark. The old fund’s performance cannot simply be disregarded. It influenced the performance of the fund lineup for the time it was there. Therefore, you must keep track of how well the fund did during the time that your plan offered it. That’s essential information for evaluating how well your plan adviser performed for you.
A company’s retirement plan committee should never forget their obligation to their employees. They need good choices on the menu if the employees are to grow strong for retirement. I discuss more tips for fiduciary committee members on how to improve 401(k) investment management and results in my new book, Rewarding Retirement.