401khelpcenter.com Logo

Guest Article

Putting Participants First

By Russ McAlmond, President of Evergreen Capital Management Inc. Evergreen provides investment consulting services to 401k plans and high net worth individuals around the country. He can be reached at 503.223.8880 or at russ@evergreencap.com.

    
The retirement plan business has become very big business. We have high-powered consultants advertising they advise on over $2 trillion dollars, mutual fund companies managing hundreds of billions of dollars for Fortune 500 companies, millions of dollars spent on advertising, thousands of fast-talking salespeople trying to convince yet another company to turn over their retirement plan business to them for better results, and the list goes on. But what about the participants?

After all, it is their money which is generating all the fees and revenues that pays for this huge industry. That average participant with a few thousand dollars in their 401k plan multiplied by millions more which adds up to the multi-trillion dollar retirement savings we have in this country seems to get left behind when we talk about the business of retirement planning. Are they really getting what they are paying for? Are we really putting the interests of the participants first?

Participant Education

With all of those fee dollars and professionals the participants should get the very best in financial education possible, right? Wrong. Millions of participants continue to get statement stuffers/newsletters and educational websites - two of the least expensive forms of mass communication available. How many employees get a free paid lunch seminar with a live and knowledgeable speaker that helps them understand their retirement plan? The Federal Reserve does this for their employees according to Fed Governor Ed Gramlich because they feel that purely passive approaches to education will not work. More sponsors should be considering alternatives to this old paradigm of participant education.

If we were really putting participants first that would mean being proactive with their financial education, not passive. Get them motivated to come to a training session. Pay them for their time or sponsor a free lunch. Rent an auditorium and invite a thousand of your employees in for a retirement planning session and ask them to bring their spouses. Do not depend on solely on passive education material on websites that will never get read. That approach isn't working now and it won't work in the future.

Participant Investment Options

With all of this money to leverage, at least participants should get the very best investment options available, right? Wrong again. Most participants get a measly selection of investment choices (the national average is only eighteen) chosen by the mutual fund company that often includes a disproportionate amount of funds from the same mutual fund family. Too often the mutual fund company is selected because it makes the operation of the retirement plan easier not because it is the best performer.

Putting participants first would mean giving them the very best in investment choices and monitoring those choices continually. If managers failed to perform, fire them and get other managers. In order to do this effectively, you must have an completely independent advisor that works with your plan to recommend and monitor investment choices, be proactive about their selection, and in their replacement if they fail to perform.

It would also mean giving them enough choices to provide a well diversified and balanced investment portfolio. I have written before that this means at least 23 different asset classes not including targeted options. I continue to stand by that number as a minimum amount for every 401k plan in order for your participants to be able to construct an efficient investment portfolio.

Participant Risk Tolerance

With all of this money for advice and investments participants would at the very least get someone to help them go through the most basic investment function of all - a risk tolerance questionnaire. Right? Sorry, it just doesn't happen. We depend on passive statement stuffers full of hypothetical questions and websites that have fancy places to click to do this for us. How many participants are motivated to complete these questionnaires or even understand what they are doing? Very few. Most plan sponsors agree that participants need more individualized advice and counsel which is confirmed by the participants themselves in survey after survey.

Putting participants first would mean providing them with live paid instruction in a setting that is conducive to learning. Provide a couple of hours out of a work day at least once a year to talk about this very important part of their personal financial planning and give them the opportunity to ask questions of a independent and knowledgeable advisor, preferably a licensed Certified Financial Planner (CFP) or Chartered Financial Consultant (ChFC).

Putting participants first would also mean that your company would make sure to have on file for each employee who is participating in your 401k plan a completed risk tolerance questionnaire by the employee. Why? Because if you don't help your participants understand this simple and absolutely necessary questionnaire then you don't know enough about your participants to offer them any investments at all.

It is required practice in the investment world to never recommend an investment to anyone without having a least a minimal understanding of their risk tolerance. How can you say that you are helping your employees with their retirement if you are not willing to make sure this first elementary step is taken and you have the document to prove it?

New Roth 401k

With the advent of Roth 401k plans, we will be getting more and more of our participants hard-earned money to be placed in their retirement plan. This increases our duty to provide participants the best financial education and resources we can. As fiduciaries our responsibilities and liabilities are increasing.

I have worked with individuals my entire financial services career and have noticed that the two main places their wealth comes from is their home and their retirement plan. It is critical that participants get good advice about their plans and excellent investment options. It will make a substantial difference as to whether or not they are able to enjoy their eventual retirement from the workplace.

Put the Participant First

There are companies that are doing some of these things but very few are doing all of them. We need to stop patting ourselves on the back for a slick retirement newsletter or website and ask if the participants will really read it. We need to broaden and increase the quality of our investment choices so the participant is getting excellent managers. We need to provide live instruction and help our participants fill out a risk tolerance questionnaire question by question so they know what kind of investor they are before making any investment selections.

We need to give our participants the value and respect they deserve since their money pays all of our salaries. We need to put them first and give them the best we can offer.

###

401khelpcenter.com is not affiliated with the author of this article nor responsible for its content. The opinions expressed here are those of the author and do not necessarily reflect the positions of 401khelpcenter.com. This article is for informational and educational purposes only and doesn't constitute legal, tax or investment advise.


About | Glossary | Privacy Policy | Terms of Use | Contact Us

Creative Commons License
This work is licensed under a Creative Commons Attribution-NoDerivatives 4.0 International License.