Working Together to Improve 401(k) Plans

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In 401(k) plans, many Americans’ only retirement vehicle, people have to be their own financial planners. Yet because their employers don’t provide enough advice — or the right kind of advice — most people are ill-equipped to manage their 401(k) accounts effectively.

Many fail to contribute enough money to their accounts or take full advantage of employer matching money, when available. They also fail to choose a combination of investments that adequately manages portfolio risk, when this is even possible — many plans don’t offer enough options.

Workers’ investing errors typically include putting too much of their money into money-market funds, which pay too little interest to grow enough assets for retirement; chasing past performance by choosing last year’s stellar mutual funds; and dividing assets equally among various options, a move that lacks strategy and usually doesn’t assure diversification.

Aware of these errors, many employers in recent years have sought to solve the problem by opening their plan doors wide to target-date funds -- mixed-asset investments that tout a “glide path” to investors’ target retirement date by adjusting holdings as they age. The problem with this is that, like the money-market funds now holding a lot of 401(k) money by investors’ choice and by default, target-date funds tend to be heavily invested in bonds, especially in the final years before retirement. So these funds don’t tend to deliver the kind of returns that many people need to retire.

A more fundamental problem is that target-date funds can’t be individually configured. Instead, they’re a one-size-fits-all solution for investors with varying goals, needs and risk tolerances. And uninformed employees sometimes make the mistake of choosing more than one target-date fund.

Thus, workers seeking to build the best possible retirement nest egg are back to square one. They lack the knowledge and expertise to construct and manage a 401(k) account that works for them individually because they don’t get good advice. And all too often, employers fail to provide them with enough help, especially at small companies, which don’t have financial professionals in-house to handle this. The root cause of this and other common shortcomings of plan offerings is often a lack of investing knowledge among plan administrators. So workers and employers are basically in the same boat: They both need expert advice.

New federal rules are ratcheting up pressure on employers to assure better plans, with more objective advice, for reasonable fees relative to the overall market for these services. As the new rules force employers to take a hard look at what they’re paying for their plans and what they’re getting in return, many will find that their employees have long been receiving precious little, if any, plan education or advice, despite high fees in many cases.

Though the new federal rules don’t tell employers what type of advisors to hire, they require employers to determine just what type of advisor they’re using. They must find out whether their advisor is a fiduciary – a legal/regulatory term for advisors who are obligated to always put their clients’ interests ahead of their own, avoiding even the appearance of a conflict of interest. In a 401(k) plan, this means advising employees in their best interests on investment choices from plan offerings. As 401(k) plan sponsors, employers themselves have fiduciary responsibilities.

The only financial professional advising many 401(k) plans is a broker. Yet most brokers go to great lengths to avoid being classified as a fiduciary because of the considerable regulatory burdens and increased legal liability this status brings. Employees who don’t understand their plans should go to their HR departments and ask about getting objective advice in general education sessions or one-on-one. Though many employees might feel that their employers don’t want to hear this, they should be aware that employers need worker input to improve plan education and the plans themselves. These discussions shouldn’t be adversarial because such improvements come at no cost to employers. Typically, most or all fees are paid by employees in plans; the money comes out of their accounts. And after all, company executives often participate in the same plans.

Improvements are more likely to happen if workers and employers work together to develop better 401(k) plans supported by better education and advice. For employers, success in this regard is creating a better benefit to attract and retain better workers. For employees, it’s a more effective plan that they can use to create a better-funded retirement.

Any opinions expressed here are those of the columnists and not of ABC News.

Ted Schwartz and Jamie Cornehlsen are advisors with Capstone Investment Financial Group in Colorado Springs, Colo. Cornehlsen is also president of Dunn Warren Investment Advisors in Greenwood Village, Colo. A Certified Financial Planner®, Schwartz advises individuals and endowments. He holds a B.A. from Duke University and an M.A. from Oregon State University. He can be reached at ted@capstoneinvest.com. Cornehlsen, a Chartered Financial Analyst®, advises business owners and employees on retirement plans. He holds a B.A. from the University of Colorado and an M.B.A. from the William E. Simon School of Business at the University of Rochester. He can be reached at jcornehlsen@capstoneinvest.com.

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