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.