Sure these are vitally important to the success of our plans…but just as important to implementing the best stuff is the need to call out the bad stuff and tell our plan sponsors and our peers what not to do!
1. Inappropriate Auto Enroll – auto enrolling at such a low percentage such as 1% or 2% does nothing to help anyone except for bragging rights for having high participation. It hurts the profitability of the recordkeeper and sets up the participants for disaster! Retirement readiness is supposed to be the mantra for our industry….and an inappropriate automatic enrollment is the number one offender for bad practice!
2. Auto Enroll without Auto Increase – I understand that the first time a company implements auto-enrollment it wants to make sure it works before implementing automatic deferral increases. But the social experiment worked…auto-enrollment has been highly successful and we have tons of data across every industry and every demographic to prove it. So…for a plan committee to vote to add auto-enroll and leave out auto-increase is a bad idea!! The number one key to success is savings rates…so let’s keep the plan focused.
3. Lack of payroll integration – plans can be more efficient if sponsors submit all of the data each and every payroll and let the payroll company determine eligibility, and track all data. The annual testing process is more streamlined; fewer mistakes are made throughout the year. This should be more pronounced as the default way of doing business. The large market gets this…but we should be telling plan sponsors not having this two-way bridge is considered an ineffective way to administer their plans.
4. Fear Factor – fear based selling can be effective, but usually doesn’t help the participant. The Employee Retirement Income Security Act (ERISA) has one main rule…do what’s best for the participant. Too much focus on scaring committees doesn’t help the poor folks that need to be focused on saving more money!
5. No notes? – Oy vey, yes we still see plans with no notes as to how a decision was made or why an action was implemented, yet the plan sponsor wonders why its plan isn’t working well. Always write it down!
6. Focus on Median …not the average – This is an industry problem….averages tell us nothing! An average account balance does help the recordkeeper “price” its services but doesn’t help anyone else. We need everyone to focus on the middle participant and out from there! It will be eye opening for most plan sponsors and advisers. In my experience, the median is usually 20% to 30% of the average.
7. Promoting 3(38) when not needed – I still come across plans with the median account balance less than $10,000. Frankly, spending more money on a 3(38) fiduciary adviser will only add cost and will not have any effect on this participant’s ability to have a meaningful retirement.
8. Risk-based and target-date funds – as if plan participants can determine the difference! Just like plans do not allow for competing money funds…plans should not have both risk-based and target-date funds. Pick your preferred default style and stay consistent and true to it.
9. Letting the recordkeeper control the message – It’s your plan Mr. or Mrs. Plan Sponsor …not your recordkeeper’s. I see plans change recordkeepers and the message for participants changes, but why should it? The key to success didn’t change…it’s still save, save, save.
10. It’s not relevant! – This perhaps should be the only rule! Keep the recommendations relevant to the plan success. While plan fees and fiduciary governance are important…the only way to guarantee more money (output) is more input (save)! Stop over communicating non-relevant messages.
Jason K. Chepenik, CFP®, AIF®, CkP
Securities are offered through LPL Financial, Inc. an independent, registered broker/dealer. Member FINRA/SIPC. Advisory services provided by Independent Financial Partners.
NOTE: This feature is to provide general information only, does not constitute legal advice, and cannot be used or substituted for legal or tax advice.