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,
says Brian Allen, author of Rewarding Retirement: How Fiduciary Committees Can Elevate Workers, Companies, And Communities, and founder of Pension Consultants, Inc.
“Workers are not being put on track to retire on time with dignity, and this issue must be addressed,” says Allen. “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.”
Allen says that for 401(k) plans to prepare workers to retire on time, company retirement plan committees need to get 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 helping the participants accumulate enough money for a secure retirement is the ultimate objective of the plan,” Allen says. “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,” Allen says. “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. Allen says that 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,” Allen says. “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,” Allen says. “They need good choices on the menu if the employees are to grow strong for retirement.”
Brian Allen is the author of Rewarding Retirement: How Fiduciary Committees Can Elevate Workers, Companies, And Communities, and founder/chairman of Pension Consultants, Inc., a fee-only plan adviser on a mission to improve the financial security of American workers. Allen has been an advocate for professionalism and a pioneer in the qualified retirement plan industry for more than 25 years. He was an early mover to a business model that eliminates incentives and inducements that can influence recommendations to clients, including commissions, gifts, marketing payments, and exotic trips.