Viewpoint: One Fifteenth

Providing “good funds” isn’t enough.

Recently, I had the opportunity to meet with a CFO and owner of a nationally recognized manufacturer to discuss its 401(k) plan. As is customary the first time I meet with a potential client, I attempted to ask a lot of questions about the culture of the firm, its history and the attitude towards the fiduciary act of sponsoring a qualified retirement plan. What I knew prior to the meeting was that the average account balance for the firm’s participants is approximately $40,000, 20% of employees who are eligible do not participate and an additional 30% of employees only contribute 1% to 3% of earnings to the plan, despite a safe harbor match.

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During that initial meeting, I discovered the plan offers 19 funds (10 of which are Large Cap, Domestic focused), and less than 5% of the participants use the target-date fund offerings. When I asked questions about the fund line-up, the CFO became agitated and cut me off. “We only need to offer funds that out-perform their competitors. Our broker provides us with a quarterly report from the platform (a major insurance company) and we change funds according to that report.” I thought this was interesting. I also thought about the 20% of the employees who have zero chance of achieving retirement readiness and the additional 30% that have almost no shot.

The title of this piece comes from the follow-up conversation with the CFO a couple of weeks after the initial meeting. The CFO had requested a report about fund performance, which was delivered. When he asked me about the funds in the follow-up, my response was simple, “Funds and performance is only about 1/15th of the total experience. In fact, for the 20% of your employees that aren’t participating, it’s pretty much a moot point.” The CFO wasn’t happy with my response. In fact, he became irate. Just before he hung up on me, he screamed into the phone, “One Fifteenth!!! I can’t believe what I’m hearing! The only responsibility we have is to offer good funds!” With that, the line went dead……

 

Somewhere along the line, the incumbent broker told the CFO that what he’s doing is perfectly ok. Somewhere, the CFO got it burned into his head that offering “good funds” was the only job he had. Somewhere, he wasn’t given very good advice about acting in the capacity of a fiduciary. And probably at no time in his past did the concept of helping everyone at his firm save enough for retirement enter into the equation.

The point of this story is pretty simple. We as an industry have a heck of a lot of work to do. This isn’t an isolated case; I’m sure that many of you reading this recognize that set of conversations and the frustrations that go along with it. In fact, when I’ve shared this story with others, they shared similar stories with me.

In my mind, Job One is helping each and every plan participant get the most out the savings and investment opportunity that comes with a 401(k) plan. Embracing the positive inertia of auto-enrollment (and auto-increase), the professional management that comes with target-date funds, asset allocation funds and professionally managed options helps the participant that needs the most help. Giving more help to those who wish to participate in the process is critical, as well.

If you’re the incumbent broker on this particular plan, shame on you for allowing this set of circumstances to fester.  Better education and communication to the CFO and a better understanding of the realities of the great American retirement income shortage may have done some good. Having the backbone to say that there’s a better way would help, as well.

One-fifteenth of the total picture? For half of this particular company, I may have grossly over-estimated the value of having “good funds.”

 

Thom Shumosic, CFP, AIF, MidAtlantic Retirement Planning Specialists

 

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.

 

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