WHAT YOU SAY? IS THIS BLASPHEMY? HOW CAN PEOPLE PLAN FOR THEIR FUTURE WITHOUT TAKING ADVANTAGE OF THEIR WORKPLACE RETIREMENT PLAN?
Employers don’t need to wring their hands if some of their employees don’t participate in the retirement plan. Sure, it is helpful to most of your employees to inform and educate them about your plan and how it can benefit their future. But you’ll never know the specific situations of all your employees and it is not your business to pry. Of course, I’m not encouraging anyone to skip out on their retirement plan and for employers not to care about it, but for some people it’s just not a big deal. These outcasts tend to fall in one of the following groups:
THE RICH. There aren’t really all that many of these people, at least from my perspective, but they don’t need to worry too much about putting money in their 401k plan (if they are even working with the rest of us stiffs), SEP, Solo 401k or whatever they might have access to. Maybe they won the lottery, benefit from a trust, received an amazing inheritance, their spouse/partner has a seven figure income, etc. It can happen any number of ways. However it happened doesn’t matter – a pre-tax savings plan is just a drop in the bucket for the rich.
THE PENSIONED. Yes, these people are still out there. They have some excellent pension plan that will provide more than enough income for them in their retirement years.
THE OTHER INCOME PERSON. These people have relatively significant income from some other source, like a farm or business, rental units, royalties, etc. Many of these people plan on selling their business later in life or just living off of the income until they pass away.
THE LOW EXPENSER. Really! People with little or virtually no expenses. They live with friends or other family members or in an RV. They might receive support for food and basic necessities from others and don’t buy much of anything else. Some are professionally frugal and amazingly thrifty. I think many industry commentators and observers would be surprised at how some have learned to get by in this fashion!
THE WORK FOREVERER. Why save for something that you will never need? If you are the work forever type, then what is the point of having or needing a 401k account? (High regret possibility with this one!)
While there may not be many of these people, guess what – THEY’RE REAL. I have met several of these folks over the years. If they don’t want or need to participate in a retirement plan, that’s their decision. Most will end up fine – others may regret their decision.
Have you come across these people before? Do you know of any other categories?
What if your company’s retirement plan never required your employees to do anything! Would this be a good way to run your plan? How would it work? Consider this:
Your new 25 year old employee starts and on his/her first day of employment he is automatically enrolled at 6% and receives the company match of 3%. The beneficiaries use standard defaults and the investments are defaulted as well to very low-cost target date funds.
Each year, with auto escalation, the contributions increase by 1%. When your employee reaches age 35, the contributions cap at 15%. They stay at 15% until they hit the IRS maximum or until the employee retires at age 67, whichever comes first.
Along the way, this employee never looks at statements. They never change their contribution amount; never borrow or withdraw their money, and never have a question about their account. The contributions keep coming in – year after year. They spend their time budgeting, controlling their expenses, managing their health, and enjoying their life and their family. They concentrate on the things they can control and don’t worry about the things they can’t.
Could you really have a retirement plan like this? What would become of this employee (assuming they won’t go crazy working for the same company for 42 years)? Wouldn’t you be concerned that, without the help of the experts in the financial services industry, they would end up far short for retirement?
An employer would never do this because, ya know, you just can’t. It wouldn’t be prudent, would it? You have to hire experts to monitor your plan and make sure of whatever you need to make sure of.
And to be sure, no person would behave this way and I am not advocating for it. In fact, our business is based upon the notion that the value we provide in the form of guidance to organizations and individuals on their retirement plans will produce a better outcome for the plan participants.
But the financial services industry is simply filled with too much nonsense and jargon that passes for professional assistance. Much of this guidance comes at a steep price – which acts as a drag on the earnings of plan participants. It is an unnecessary transfer of wealth from people trying to save and plan for their future to the careers of those in the industry.
I am confident that this simple, do nothing approach would, in most cases, produce a better outcome than relying on an industry that spends millions on investments that try to beat the markets, more millions providing consulting services evaluating these investments, and even more millions on marketing dollars to promote these investments and consulting services.
It is generally assumed that the retirement plans of larger firms would be better than plans of smaller firms. Right? Not so fast. In my experience, and I have quite a bit of it, there are specific features of smaller firms that offer them the potential to have a better retirement plan.
Before I explain how this can happen, what is it that makes one plan “better” than another plan? The answer is somewhat subjective. But let’s be clear about this – the best feature of any plan is the amount of money the employer contributes. If your employer contributes 8%, 10%, 12% or more then you have a good or great plan. If your employer puts in a lot of money for you and your plan has high fees and crappy service, as far as I am concerned, you still have a great plan!
But most plans, large or small, with high employer funding amounts tend to be outliers. Most plans contribute in the area of 3% to 6%. So, if we eliminate the amount of employer contributions from the evaluation, how can a smaller employer have a better plan? These three aspects of smaller firms could enable them to offer a better benefit to their staff.
First, we believe that many smaller employers are simply more aware of the needs of their employees as it relates to saving and planning for their future. Larger organizations tend to be more removed from the rank and file. But in smaller firms, those that design the plans have a keen sense of the aspirations and challenges of their employees. They are simply more in touch with their employees. This provides an opportunity to craft a plan that might be closer to the needs of the entire organization.
Second, smaller employers are less likely to have quarterly Investment Committee meetings on the retirement plan. This idea is heresy to many advisory firms, but in our view many of these meetings are just a waste of employee energy and company resource. All employers need to review their plans periodically, but quarterly meetings, which are more likely to happen in larger firms, are just overkill. If an employer, large or small, sets up a smart retirement plan with a straightforward Investment Policy Statement using an array of low-cost index funds, they should be fine with annual meetings or scheduling meetings as the circumstances demand.
Finally, many smaller companies are more willing to provide personal guidance to the employees. Smaller firms typically work with advisers on their plan. They tend to more supportive of their employees receiving personal guidance. Larger firms are more reluctant, for several reasons, to provide a personal resource to the employees. They may be more controlling of this aspect of employee education and/or unwilling to handle the logistics involved in providing personal support services to staff. This might be a nice feature of smaller companies, but beware! If you provide guidance to your employees, make sure your adviser is not using the interactions with staff as an opportunity to sell products and services to the employees. This is really, really lame!
What about fees? Most surveys of plan fees reveal that large plan fees are on average, as you might suspect, less than the fees of smaller plans. It is certainly the case that larger employers have an opportunity to have lower cost plans. However, it is now possible for smaller employers to substantially reduce their costs – they can achieve overall costs per participant which are relatively close to those of large plans. Maybe not as rock bottom low as some large firms, but they can get pretty darn close.
What do you think? Do you know of smaller employers with great retirement plans? Or is this notion ridiculous?
I saw a note (link might be blocked) that a $1.6 Billion 401k plan decided that revenue sharing was, among other things, not a good idea for their plan. Duh! Was it that hard to figure out? What took so long? They could have read this blog in 25 seconds and realized this. But that would have been too easy.
They interviewed six different firms over seven months and used a consulting firm with an impressive sounding name. I am sure they generated reams of documents with analysis as well. I would guess that many people were involved in this process and there were multiple meetings and discussions and consultations and… I wonder how much they paid for all of this amazing advice?
It turns out that they “negotiated” lower fees on some of their fund options. Congratulations! But does a plan this size really have to negotiate hard? All sarcasm aside, I applaud them. They ended up with a better plan which will clearly save their employees money – which is great. But will all due respect, HAVING A GREAT PLAN IS JUST NOT THAT HARD! I could have told them how to do it in 30 minutes.
I know they aren’t asking, but my suggestion would be to write a three page Investment Policy Statement (IPS) and use a bunch of index funds from Vanguard. Make sure that the IPS is written so that most of the employees in the company can understand it – not just a bunch of suits from financial services firms. Get rid of the consultant. Save all of this money for something else more useful. Simplify the whole thing. Or, as Albert Einstein said, “Everything should be made as simple as possible, but not simpler.”
Since we work on retirement plans day in and day out, sometimes we forget that many plan sponsors don’t have a basic understanding of the fees your retirement plan should pay. We’re sorry about that – our bad!
Unfortunately, if you are like most smaller employers, you may not know how you should be paying for fees. Here is a quick primer on what your plan should be pay. We break it down into three categories:
MUTUAL FUNDS. These are the investment options in your plan. Their fees are known as expense ratios and can range from .05% to maybe 2%. Big range, right? (If you are using insurance accounts, stop it – get rid of them). Bond funds are typically less than stock funds. Index funds should be less than actively managed funds. International funds are typically more than domestic funds.
The fund expenses are deducted from your employees’ accounts. We think you should use mostly passive index funds from Vanguard. If you do, the cost will probably average .12%. This means that for each $10,000 an employee invests, they will pay $12 a year.
RECORD KEEPING. This is the cost to run your plan. Record keeping is the engine of your plan. Your record keeper processes the payroll, handles distributions, generates your Form 5500, handles plan testing, provides your plan document, etc… Sometimes this is also known as TPA work. (Some organizations have a separate TPA, but this work is generally lumped together in most cases. We don’t think you need a separate TPA for your plan unless it is complex or weird). Also, the plan’s trust services are typically part of a record keeper’s service. When you add all of the record keeping fees together (except for the trust services – which should be between .05 and .10 bp), you should be able to easily calculate this as an annual fee.
This should be paid as a flat fee. It is typically paid quarterly. You can have your employees pay it and have it deducted from their accounts or you can choose to pay it directly.
ADVICE. Your organization probably needs help running your retirement plan. And your employees probably need help too. The firm providing advice to your plan will help you decide the best type of plan for your company, the investments for your lineup, how to establish an Investment Committee and an Investment Policy Statement, how to educate your staff, etc..
Just as the record keeping fee, it should be a flat fee (not a percentage fee!). It is typically paid quarterly. You can have your employees pay it and have it deducted from their accounts or you can choose to pay it directly.
THAT’S IT! These should be the categories of fees you pay. Record keeping might be the most difficult to figure out, but you should be able to determine what it is with a little research and assistance.
BY THE WAY, YOU SHOULD NEVER, EVER, EVER, EVER, EVER, EVER HAVE ANY OF THESE COMPANIES SHARE REVENUE. PERIOD!
How important is candor, or an honest message, when you determine where and how to invest? The value of candor in the financial services industry came up in a recent interview with Jack Bogle, the founder of Vanguard. Over the years he has said much, written much, and had much said about him. The Bogle/Vanguard story is unique and compelling.
In this interview, he made a comment that I thought was profound. It was brief and even simplistic, but it really struck me. He was asked if the index fund had won. As he answers the question and comments on the growth of the index fund as a successful option for all types of investors, he describes the index fund message as “…candor as a marketing strategy.” Read the article in the link and look for the quote.
Though this is obviously true, I’ve never heard it expressed so eloquently. The Vanguard approach to investing could not be any more honest. Their core product, the index fund, is the market. You get what the market delivers, less whatever it costs Vanguard to provide it. A simple idea. At this point in my career this is the message I want to buy and what I suggest my clients buy as well.
But how susceptible are you to the marketing stories and schemes common in financial services? Do you prefer a good story or are you willing to accept a less glamorous, honest message? If you want your money to “work hard” for you, will the straightforward candor of Bogle and Vanguard win you over?
Unfortunately. I believe that most investors are not willing to settle for pure candor. Vanguard has done an amazing job, but too many people want to believe in the message that someone can deliver more than the market. In the financial services industry, too often great story telling and marketing trumps candor, and honesty truly is a lonely word.