Giving Yourself a Gift
My Holiday Wish List for Your 401(k) Plan in 2013Here are eight action items for you to put in your Christmas stocking or under your menorah to create successful retirement-plan outcomes for you and your employees in 2013.
• Create or review the investment policy statement (IPS). If your 401(k) plan was audited by the U.S. Department of Labor (DOL), which is a greater possibility now that the DOL has hired an additional 300 auditors, one of the first documents they will ask for is your plan’s IPS. The ideal IPS gives clear guidelines, creates a reasonable process, provides a roadmap for making sound, long-term-oriented investment decisions, and even outlines criteria for keeping the investment committee, or a solo-business-owner plan sponsor, on track.
• Benchmark plan fees and services. You should review your plan fees and services on an annual basis and, at least every three to five years, perform a full RFP (request for proposal) and benchmark your plan’s fees and services to determine the ‘reasonableness’ of the fees you are paying and the level and quality of the services you receive from all your service providers.
The onus is on you, the plan fiduciary, to benchmark the fee and service data you now possess. This can be a detailed and lengthy process, requiring considerable expertise. This is where the services of an advisor with the knowledge and expertise of the retirement-plan industry can be an invaluable asset.
• Perform investment due diligence. You should review your plan’s investment options and benchmark the performance and fees on a regular basis — either quarterly, semiannually, or annually — to insure your participants are receiving ‘best in class.’
• Assess the plan’s investment menu. In the current, dynamic investment environment, you should perform investment-structure evaluation as part of your regular due-diligence process. Some things to consider:
— Is your money market the most appropriate ‘cash’ account for your plan? Most are paying 0% after expenses today.
— Should you streamline the investment-fund lineup? Less is more. As a rule of thumb, 16 to 18 fund choices should be enough.
— Are diversification funds, such as real estate, natural resources, emerging markets, and inflation-protected bond funds appropriate options to add?
— Should you add low-cost index or ETF fund options to mitigate costs?
— If your qualified deferred investment account is a money-market or guaranteed account, you should consider changing to a target date, lifestyle, or age-based managed account for greater fiduciary protection.
• Examine your plan’s target-date fund. After the passage of the Pension Protection Act in 2006, plan sponsors rushed to add target-date funds as their qualified default investment alternative (QDIA), and many settled on their record keeper’s target-date fund. At least 50 to 60 new target-date fund options have been launched since 2006.
What seemed like a good fit six years ago might not be so today. You should consider re-evaluating your target-date fund for a number of reasons: performance, fees, and glide path — is your QDIA a glide-to or glide-through retirement glide path, and which do you deem appropriate for your employees? Actively managed target-date funds and funds with tactical and asset-protection strategies have entered the market. You should evaluate your target-date fund’s appropriateness at least once a year.
• Revisit auto features. I wrote an article titled “Bold and Scold” some time back. In it, I encouraged you and your plan advisor to consider adding auto features to increase the chances of your employees achieving greater success at retirement. You should add all auto features that the Pension Protection Act offers, not only because you are protected as a plan fiduciary, but because these feature automatic enrollment, automatic increase of employee contribution by at least 1% a year, and auto-default into your plan’s target-date fund; all have been proven to increase an employee’s chances of retiring with more money in their plan and thus more income at retirement.
• Increase employee education and communication. Your employees need help and encouragement to save an ever-increasing amount throughout their working years. Your 401(k) plan is the single greatest mechanism they have to achieve a successful retirement with what I call a ‘paycheck for life.’ In addition, the two largest assets your employees will own in their lifetime are their home and their 401(k) account balances.
They treat their home with respect. By this I mean they would never go to Foxwoods or Mohegan Sun and bet their home on ‘red 7.’ Yet, every day, they treat the 401(k) like a casino, because the average employee does not have the time, tenacity, or expertise to pick investments. They need help, and they need it on an ongoing basis. At a minimum, you should have your plan’s advisor available twice a year to provide group education and meet once a year, one-on-one, with all employees to assist them in making more informed and more appropriate saving and investment decisions designed specifically for their personal financial situation.
• Document, document, document. The DOL has essentially stated in numerous retirement-plan litigation cases that, if it wasn’t documented, it never happened. Make sure you document everything you do related to your company’s 401(k) plan. Record all investment due-diligence meetings and fee-benchmarking and RFP analysis. Record all education meetings and plan communications. Keep a plan file with all plan documents and reports. Be prepared for a DOL audit in advance.
I hope you will unwrap all eight of these plan recommendations and put them into action in 2013 and beyond. You will sleep easier, and your employees will be more successful in creating paychecks for life.
Charles D. Epstein is the author of Paychecks for Life: How to Turn Your 401(k) into a Paycheck Manufacturing Company. As the 401(k) Coach, he has been nominated one of the top 100 most influential individuals in the 401(k) industry by 401kWire; (413) 478-8580; www.paychecksforlife.org