By: Michael Meyers, Partner, Mountain Hill Investment Partners 

From the Department of Labor website:  Plan sponsors and other fiduciaries have a solemn responsibility to protect the interests of the workers and retirees in their benefit plans. That’s a pretty broad definition…There are specifics of course, but still, what does this really mean? If you’re reading this you should know you’re a fiduciary, but what’s next? How can you improve and where is regulation potentially going in the future?  

Facts:  

Employees are saving a higher percentage of their compensation than ever in their 401ks and a growing number are taking advantage of the opportunity to save in a Roth 401k option. According to new data from the Plan Sponsor of America (PSCA), part of the American Retirement Association (ARA), plan participant deferrals rose in 2018 to an average of 7.7% of pay, up from 7.1% in 2017 and 6.8% in 2016. PSCA’s 62nd Annual Survey of Profit Sharing and 401k Plans also found company contributions coming in at an average of 5.2% in 2018, raising the average combined savings rate to 12.9%, up from the previous year’s record finding of a combined savings rate of 12.2%. Furthermore, the survey found that nearly a quarter of participants (23%) elected to contribute to a Roth when given the opportunity, up from 19.5% in 2017 and 18.1% in 2016—a 30% increase in just three years!  

The Puck is moving: 

This is good news but shouldn’t come as a surprise. Companies have long been moving away from pension plans and many of those that still exist are underfunded or on the brink of failure. So, in the words of hockey legend Wayne Gretzky, “Skate to where the puck is going, not where it has been”. You’ve provided the plan; the fiduciary duties have been handled, but there’s more to be done. If you’ve been paying attention, it should be clear that regulations won’t be relaxed. As a 401(K)-plan advisor, I see the DOL “puck” going to employee education and financial well-being, e.g., making sure that employees have the tools to make the most of their retirement plan. According to ENR’s recent article in the December 2019 issue, AGC Contractors Expect Demand To Increase in 2020, Still Worry About Labor Shortage: “Three out of four contractors surveyed plan to bolster their company’s head count in 2020”. If you want to be completive in the hiring landscape, a 401(K) coupled with a robust education and support system is imperative! 

Think of 401(K) employee education like you might think of safety training. You can provide workers with all the appropriate tools to be safe, but without education and reinforcement, you won’t foster a safe culture and accidents will happen. The training isn’t important because workers don’t know how to do their jobs, it’s important because it serves as a reminder that they face real dangers every day. Along the same line, simply providing employees with a great 401(K) doesn’t mean they’ll experience great outcomes. In large part, employees who are offered a 401(K) know how they work and why they’re important, (the deferral data certainly suggests that) but they require education and advice to make decisions that will provide a roadmap for a financially healthy retirement.  

In my view, positive outcomes for employees in their 401(K)’s begin with an education program coupled with unbiased, one–on–one advice from a financial advisor. Participants have several decisions to make in the 401(K): How much should they defer into the plan? Should they contribute to the traditional 401K, Roth 401K, or both? and what investment options should they select? These decisions are not easy for employees and employers are not equipped to answer them, nor should they. They require careful consideration and the help of an advisor that offers individual support. For one on–one–advice and support to be meaningful, advisors should be asking your employees questions like: 

  • Do they have enough savings accessible to them to cover emergencies?  
  • If they are married, does their spouse work and contribute to a retirement plan? 
  • Do they have any debt?  
  • What is their risk profile?  
  • Do they understand the investment options offered to them? 

The answers to these questions give the advisor a blueprint by which to provide the appropriate advice for that individual. For example, giving advice to an employee that they should max out their contributions to the plan, without knowing that they have little to no savings to cover unforeseen expenses, would be inappropriate. That employee should be building an emergency fund and revisiting 401(K) contributions later…It seems counterintuitive for an advisor to suggest that an employee NOT contribute to the plan, but sometimes it’s the right thing to do in order to improve their overall situation. To address this, I recommend plan sponsors coordinate semi-annual group employee meetings (mandatory), arranged in conjunction with the plan advisor, followed by availability for individual one-on–one meetings. Advisors should be available to employees on an ongoing basis, but in my experience, engagement is higher when group meetings are part of the process. 

But getting back to the data from Plan Sponsor of America, what can you do with the knowledge that savings rates in 401(K) plans are increasing? You can start by giving employees the tools to make sure their hard-earned dollars are being productive for them. The most common error I see employees make in their 401(K) is within their asset allocation, i.e., how much risk they’re taking. For example, target date funds are a great solution for participants in 401(K) plans when used properly. These are the funds in your 401(K) with a year at the end of the name, the Vanguard Target Retirement 2035 for example (this fund would be utilized by someone expecting to retire in 2035). Regardless of the year of the fund we’re discussing, they all begin their lifecycle more heavily weighted to risk assets like stocks with smaller exposure to safer assets like bonds. Over the course of time, the fund gradually reduces risk for the investor automatically. The exact methodology varies from different fund companies, but for someone in the Vanguard Target Retirement 2050 right now, they have approximately 90% of their assets invested in stocks, whereby someone in the Vanguard Target Retirement 2020 today has approximately 50% invested in stocks, significantly less risk. These options are great for participants who are comfortable with the level of risk that their age suggests and who prefer their assets be managed for them. Target date funds are intended to be an all-in-one portfolio; however, many investors don’t use them that way. They mix them with other funds, and this skews the intended allocation. The most likely reason investors supplement target-date funds with other funds, in my view, is they don’t understand they’re supposed to be held alone; they haven’t been educated. Although it’s a fully diversified portfolio, it might feel to an investor like they’re putting all their eggs in one basket. For some participants, target-date funds appear to be a “black box”—the lack of understanding exactly how the product works, how it is allocated, and so on, can lead those participants to combine it with other investments on the core menu. Educating employees as to how these investments are structured can go a long way to ensuring they’re used properly. 

And although investments are an important piece of the 401(K), there’s many other topics to include in your education initiative such as: 

  • How to balance saving for retirement with today’s financial needs. 
  • Contributing to a traditional 401(K), Roth 401(K), or both. 
  • For those not in a position to save for retirement, how can they get there. 

And for larger companies, consider different group meetings for different age groups. The message to someone retiring in 2-5 years is much different than someone retiring in 30 years.  

As an advisor and fiduciary to corporate 401(K) plans, my firm builds education programs designed to engage employees and provide them with the knowledge to create positive outcomes in their financial lives. Employees are counting on your firms 401(K) plan to provide for them in retirement, be sure they have the tools and knowledge to use this equipment safely. Call me at (732) 291-3338 for more information or to schedule a plan review. 

 

Disclaimer: 

Mountain Hill Investment Partners is an SEC Registered Investment Adviser. We have a clearing and custody relationship with Fidelity Brokerage Services LLC, Member NYSE/SIPC.