3 Ways To Increase A Business's 401k Plan’s Investment Performance To Rank In The 90th Percentile !
Lets face it, most decision makers at large company’s are unaware that there are even different fundamental options out there when it comes to the company’s retirement plan. I am here to say that not all plans are the same. The options and features you bring into the plan can affect your overall investment performance amongst all the employees. Why is this?
Auto-Enrollment
Auto-enrollment is a feature you can set to the plan where when you have a newly hired employee into the company, they will automatically be enrolled after a set amount of time you choose. Whether that's by the next payroll date or 3 months from now is up to you. How can auto-enrollment affect your overall investment performance? Well in a 401k plan for example, the total amount of assets in the plan lets say 1 million dollars from the contribution of 30 employees can be affected when a new employee enrolls and does not contribute or contributes the minimum. It costs money to have an employee enrolled in the plan and costs are deducted sometimes from the plan assets themselves! This is because employers do not want to pay for the costs, they rather have the costs siphoned out of the same assets that the employees (including the CEO) have contributed to. I once spoke to a company who had 30% of their participants no longer employed with them and it was costing them an additional $7000 a year to have them enrolled. They never bothered calling 30 of the participants to get them to roll over their assets into their own IRA. That $7000 was being deducted from the plan assets of the company which hindered the overall net return of the plan by the end of the year.
Investment performance versus market?
If you ever received a benchmark report, you will see it compare the company’s current investment performance against the S&P 500. Although it's an ok measure it is not entirely accurate. The S&P 500 consists of 100% equities. Not everyone in their 401k plan is going to be invested in 100% stocks. Some will have a blend of bonds and stocks and vice versa. So it's not an accurate benchmark to go with. However there is another benchmark that can help a lot more. We can compare the investment performance of your company against the top ranking company in the same industry. For example a mom and pop tire store versus goodyear tires 401k plan. Just because Goodyear is a big company, does not mean they can have better investment performance than smaller companies. We can see how much better the best performer is doing against the benchmark and align our performance with theirs. This can be done by introducing more types of fund options, assigning an advisor to the plan to educate participants into better fund management and doing annual reviews to see if we are on par with the national benchmark.
Default Investment Accounts
One thing I learned overtime looking at companies already with a retirement plan was the fact that when employees were left alone to invest in the fund options of their choosing. The performance was a lot worse than default investment accounts! I think many employees want the easiest option possible and just want to “set it and forget it” . That's fine; but in this scenario it is best to have default investment accounts. Once an employee is enrolled in the retirement plan, assuming you have default investment accounts as an option; the plan will automatically invest their contributions in a fund lineup that is going towards a blend of equities and fixed income. This is why you see target date retirement funds in the 401k plan. Yes some employees also willingly choose it but if Bob from sales never chose a fund and its been 60 days, it will also enroll him into the target date fund that's most optimal for his age. If he's 50 years old and retirement age is considered 65 and the year is 2020 then the default fund he would be placed in is target date retirement 2035. Get it?
Closing Thoughs
Investment performance is an important factor to consider and there are many ways to improve it without even changing the fund options. It is not just about the types of investments you have in the plan but also expenses, employee enrollment and default options. All of these together compounding over 30 years time can be a huge difference in the plan assets. How you optimize your company’s retirement plan can affect other aspects of the plan too. It is not black n white and no, not all plans are the same. A logistics company may have a much higher employee turnover than dunder mifflin so having auto-enrollment as a plan feature could be an administrative nightmare for them.
If you are responsible for managing your company’s retirement plan and are concerned about your current investment options, I can help. My specialty is reviewing and adding 99% value to all of my clients’ retirement plans. Contact me today If you’re ready to get the most value from your company’s retirement plan and protect yourself from personal liability as your company’s fiduciary.