More Choices, More Confusion

13 Nov

More Choices, More Confusion

Part II of a series on 401(k) best practices. Read Part I.

The attitude toward retirement was changing back in the early 1980s. The concept moved from retirement as a reward given by the company for a long and loyal career, to one of personal responsibility.

Employees loved the control they could have with the new 401(k) plans. Companies loved them, too, since employers and employees alike could decide how much (or even whether) to contribute. And, because of the employee-managed nature of the 401(k) plan, companies no longer needed to worry about investment performance; the risk belonged to each individual plan participant.

Today, the 401(k) plan of the last quarter of the 20th century seems almost primitive:

  • Employee statements were distributed annually and may have been prepared using a blank template and a typewriter.
  • Plan participants could choose to invest their money in a money market fund, a stock fund, and/or a bond fund.
  • Most could enroll in the plan or change their investments once or twice a year, with a few companies allowing the opportunity 4 times per year.

With time and technological advances came even more available options…and more choices to make. More service providers, better technology and more investment options gave people more bells and whistles, and real choice in how to create their own retirement.

But options came with more and more confusion. True, more service providers and improved technology meant better pricing, but when a plan includes 100 or more available investments, how does a typical employee even begin to sift through them, let alone select the “right” investments?

It began to dawn on all of us that, in spite of their (and our) confidence, the 401(k) plan was not a true replacement for the company pension plan. Employees find their choices overwhelming and confusing, which can result in a lack of action. Many employers don’t understand their responsibilities relative to the plan. Although there are many products and services available as part of the 401(k) system, how to compare them, figure out what is needed, and truly understand the costs is still mysterious.

And most urgently, people are not saving enough.

As a plan sponsor, there are several reasons you need to care about how well employees are doing in saving for retirement. The first reason, and the one that led you to start the plan in the beginning, may have been that you want to see your employees retire securely. Another could be that you need to compete effectively for talent.

But there is another key reason that you, as a plan sponsor and fiduciary, must care: you are responsible for the plan. If it is not managed effectively, you may be held personally liable. Protecting yourself and your business against fiduciary liability is a great reason to make sure the plan is well managed.

As a plan sponsor, you are responsible in four key areas:

  • You must select and monitor service providers for the plan, which may include consultants, vendors, and auditors
  • You must select and monitor investments, ensuring they achieve an appropriate level of diversification
  • You must provide access to the information participants need to help them make good saving and investing choices, and
  • You must evaluate overall plan costs, and make sure those costs are reasonable.

Although these four areas are very important, they aren’t as difficult as they might at first seem. We will tackle the details of these key responsibilities in a future blog post.