The 401(k) Solution – Part II

By Mark Folgmann

In order to create a solution we must first admit we have a problem. If you are a regular reader of my column you will already know that I believe we have a major disappointment coming when our current workforce gets ready to retire over the next 25 years. Most 401(k) plans we review are dramatically under funded and will not be large enough at retirement to assure a desired lifestyle. The average employee has less than one year of income accumulated within their plan. Unfortunately most fiduciaries entrusted with the oversight of these plans are not actively engaged and are somewhat in denial. Operating in this environment reminds me of the quote by the Pulitzer Prize-winning historian Daniel Boortin when he said “The greatest obstacle to discovery is not ignorance, it is the illusion of knowledge.” Both employees and employers are way overconfident about their ability to deliver successful outcomes.

Albert Einstein said “You can’t fix the problems with the same minds that created them.” Therefore the solution to the 401(k) problem is for the employers and professional asset gathers (Financial Advisors) to get out of the retirement plan business. We must admit we have a problem and enlist the minds of people that truly understand the problems and know what they must do to solve them. Someone who can discharge their duties of loyalty to both the participants and their beneficiaries so they can increase retirement incomes. It’s my personal opinion that virtually all plans with less than 10 million of assets join a multiple employer plan. This is a plan that allows small business owners to ban together like the Governments Thrift Savings Plan to gain economies of scale and create successful outcomes for employees. In his August column this year Scott Simon from Morningstar Advisor calls the multiple employer plan the “Platinum Standard.”

In the marketplace there are very innovative solutions that allow the small business owner to get out of the retirement plan business while still providing a fantastic retirement plan for their employees. The business owner ends up making only one decision, to join the plan or not while everything else is automatic. Just imagine, no enrollment meetings, no boring employee education sessions eating away at company time but yet a plan structured for success while providing the company protection from liability. The best also utilize professional portfolio managers to create model portfolios to obtain market returns for their employees. Since the average employee is not trained or capable of managing their investment portfolio these professionally managed model portfolios will increase their account balances. A multiple employer plan can typically be joined for about half the cost of a typical 401(k) offered by the financial service industry. To learn more about multiple employer plans visit www.gfiduciary.com. With a combination of technology and innovation we are likely to see more and more solutions for the retirement dilemma but we must be willing to get outside the box and look for 21st century solutions.

The 401(k) Solution- Part I

By Mark Folgmann

Last time we talked about the Federal Thrift Plan and how the economies of scale have created a plan with not only extremely low cost but also very efficient investment options with great oversight. Most small business owners are at a great disadvantage because they try to set up a stand alone retirement plan and due to their size they end up paying far too much in expenses and set-up cost. They also are at the mercy of the financial service industry which markets bundled 401(k) s that are filled with excess fees, mediocre investment and often end up locked into an expensive insurance or annuity product. When I talk to small business owners I usually find two very different scenarios, the first is the busy owner who ignores his companies retirement plan due to his time spent running his company and second is the person that fills the fiduciary role but overestimates their ability to create successful outcomes for their employees.

When I review a plan with employers I already have a real good idea whether they have a good plan or not because all information about their plan is public information and can be obtained with two clicks of the mouse. Therefore I can evaluate a plan based on the mechanics of the plan which are things like contribution rates, loan amounts, investment choices and employer generosity. I can also estimate average employee balances and project number of year till the plan will be fully funded. There are somewhere between eight and twelve levers that will either create success or assure failure within a 401(k). Unfortunately most of the people responsible for the oversight of the plan don’t recognize what they are. Most of their time is spent discussing investment choices, don’t get me wrong these are important but investment choice will not make or break a plan if the more important factors are not addressed. This becomes very frustrating because they usually don’t understand their own plan well enough to ask the critical questions to assure successful retirement outcomes for their employees. They are being asked to act as fiduciary’s for their companies retirement plans and have not been trained for this role. A sound fiduciary process demands that a plan sponsor utilize Prudent Experts. Once again I stress creating successful retirement outcomes is very hard work not something you can take lightly and hope it works out. In my twenty plus years of reviewing hundreds of 401(k)s and thousands of employees that contribute to them I have only found one company plan that meets my criteria as an excellent well thought out plan that was truly created to increase their employees retirement income. Don’t get me wrong there are many plans today that are getting much better but most if not all benefit the companies offering the plan more than the employees funding the plan. Next time in part two of the 401(k) solution I will show you how to beat the odds and guarantee your company has a great retirement plan.