'Toto, I've a feeling we're not in Florida anymore.'
This is Kansas … Kansas City … where the temps have been single-digit from New Year’s Eve through most of 2018. Today, as the real temperature dives below zero, the Country Club Plaza stands frozen. My last post from Florida was miles and miles (and 80 degrees) away. But a new year calls for new resolutions.
Out with the old, in with the new; out with the cold before we all turn blue.
In America, most New Year’s Resolutions fall into one of two categories: lose more weight or save more money.
Unfortunately, most resolutions die a quick death. The failure rate is high. According to private health company Bupa, 43% of Brits failed to keep their resolutions within weeks of New Year’s Day and 80% had failed within three months. And according to US News, Americans are worse. Approximately 80% of our resolutions fail by the second week of February, which this year means we don’t make it to Fat Tuesday or Valentines before caving (that’s caving to our craving or caving in … not spelunking).
But my previous blog post handed out Final (401k) Grades for 2017 and promised that this post would offer some New Year’s Resolutions for 2018 … so we’ll give it a shot.
As you might recall, the grades weren’t fantastic for 2017, which might surprise a few readers in this market. But we’re not grading on the curve here, and grading a company retirement plan on how much funds are increasing and how much fees are decreasing is missing the point. Every retirement plan’s investments should be increasing, and every plan’s cost should be decreasing. In this market it would be nearly impossible for that not to be the case. But the criteria for success is different. We should be measuring the participation rate, savings rate, and average account balance, and by that criterion it appears that there is still much work to be done. There are still far too few Americans on track to retire well.
So here are resolutions for your retirement (whether you sponsor a retirement plan for your employees or participate in a retirement plan at your company):
1. Automate – Automate – Automate … almost everything
If your company is one of the few that has not automated everything, it’s time to get with the program, and catch up with 2006. If you’re one of the employees who has resisted automation, it’s time to accept the help like most of your colleagues.
The Pension Protection Act of 2006 encouraged employers to utilize automatic features in plan design; not only is it permissible but it’s encouraged by the regulators. Every plan has a default. A few are still set to default employees out of the plan if they don’t actively enroll. That switch should be flipped to default employees into the plan unless they actively opt out or un-enroll. This increases participation and the overall health of the plan, regardless of industries or income level. It works.
Pared with the idea of automatic enrollment is the concept of automatic escalation of savings rates, and unfortunately fewer employers have adopted this companion feature of automation. In other words, if employees are enrolled at a particular savings rate, the rate remains the same unless the employee actively chooses to increase it. Guess what? The same inertia that keeps employees in the plan if they are automatically enrolled keeps them at that same savings rate unless it is automatically increased. Turns out that we need nudges.
So, if you’re an employer who sponsors a plan, your resolution for the plan should be
a) Adopt automatic enrollment and/or automatic escalation of the savings rate;
b) And if you already have automatic enrollment, maybe it’s time to increase the deferral rate at which employees are automatically enrolled. (Betting that your “opt out” rate doesn’t drop if you increase the deferral rate by just one percent.)
Conversely, if you’re an employee in a retirement plan, your resolution for your own plan should be
a) Use the automatic features of the plan rather than opting out of them, and/or
b) If your plan doesn’t automatically bump up your savings rate each year, make a resolution to do that for yourself this year. (If you increase it by just 1-2% a year, you’ll eventually get yourself on track without even feeling the pain of the annual increase.)
2. … But don’t automate the advice, and/or don’t pay too much to automate advice
If your company is one that was “fooled” into using a Managed Accounts program for which you (or your employees) pay, it’s time to stop. There’s a reason that the Government Accountability Office issued an unfavorable report on Managed Accounts. The returns are seldom worth the additional cost.
Both the employer and the employee should make a resolution to hire an advisor, but who you hire and how much you pay is the key.
If an employer sponsors a retirement plan for their employees, they are in the fiduciary business, though being in the fiduciary business does not mean that they have fiduciary expertise. A Plan Fiduciary (that’s the employer) should hire a Plan Fiduciary Advisor, preferably a Certified Plan Fiduciary Advisor (CPFA®). I would recommend a Fee-Only Fiduciary Advisor, perhaps even an advisor who works for a flat fee (rather than someone who works on commission). By the way, a common misperception is that adding a fiduciary advisor adds cost when our experience is that adding an advisor typically reduces cost.
Conversely, if you are an employee in an employer-sponsored retirement plan, you’ll have an opportunity to manage your own retirement or hire an expert. Studies have shown that participants who self-direct are much less likely to achieve the same performance, but there are other (cheaper and better) options. Hiring a “robo-advisor” means hiring a third-party advisor for an additional fee, outsourcing your financial decisions to a person you’ll never meet. And using the plan’s Managed Accounts program means adding additional cost for the same service as a robo-advisor. I don’t recommend flying solo and doing it on your own, but be careful where you get the advice and how much you pay. If you’re years away from retirement, you probably just need the “professional guidance” offered by the plan’s Target Date Fund, and if you’re closer to retirement, you probably need to identify a trusted advisor who can help navigate that transition. But like the advisor your employer hires, as an individual you need a Fee-Only advisor who is a Certified Financial Planner (CFP®).
So, if you’re an employer who sponsors a plan, your resolution for the plan should be
a) Hire a CPFA® and/or make sure that your advisor is certified to serve retirement plans,
b) And avoid utilizing expensive Managed Accounts programs.
And, if you’re an employee in a retirement plan, your resolution for your own retirement should be
a) Hire a CFP®, and/or
b) Avoid using the plan’s Managed Accounts or a third-party “robo-advisor.”
3. Review the Target Date Funds
As I mentioned above, the easiest (and generally the best) solution for professional guidance within the plan is using the Target Date Funds. Unfortunately, some employers are misusing the Target Date Funds while employees are underutilizing the Target Date Funds (TDFs).
In 2013, the Department of Labor issued new guidance on evaluating TDFs. For a variety of reasons, some companies have ignored these provisions. Either the company continues to use the “proprietary” TDFs offered by the retirement plan’s service provider, or the company inserted TDFs without a Glidepath Optimization Analysis to first identify which TDF series would be the best fit for their employees. Using the TDF series from your recordkeeper may increase the liability for the employer.
Meanwhile, some retirement plans offer a TDF and employees still choose to self-direct. It’s always entertaining (and hardly unusual) when the partners who are self-directing underperform their employees who are using the professional guidance of the TDF.
If you’re an employer who sponsors a plan, your resolution for the plan should be
a) Review your Target Date Funds this year, and
b) Stop using proprietary TDFs (particularly without using a Glidepath Optimization Analysis).
And, if you’re an employee in a retirement plan, your resolution for your own plan this year should be
a) To use the Target Date Funds rather than self-direct. Let’s assume that your employer did an analysis to choose the right TDF, and let’s assume that if you were any good at building portfolios that you’d be on Wall Street rather than working on Main Street. So use the TDF.
4. Review the Cost
In my previous blog post I said that fees were no way to evaluate the success of a retirement plan. This is true, but if your plan has not evaluated the cost of services in several years, you have a fiduciary responsibility to benchmark fees. And if you’re an employee inside one of these plans, even though it is your company’s obligation to do this on your behalf, you should keep an eye on fees too.
The U.S. Government Accountability Office said that even “A 1% difference in fees can reduce retirement benefits by nearly 20% over the course of an employee’s career.” Make it a resolution that, as you’re putting more money into the plan, you’re not throwing away money on unnecessary or unreasonable fees.
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Again, the goal of any retirement plan should be to provide successful retirement outcomes, helping employees retire well and retire on time.
Will your employees be ready to retire?
Will you?
Resolutions are hard to keep, but failing on these could cost you millions. Make it a resolution to automate, to hire the right advisor, to review the Target Date Funds, and to review the cost.
Failure to keep these resolutions could put your retirement goals on ice.
