When evaluating providers or subsequent 401k provider reviews, some people think that being the biggest indicates being the best. However, in many industries we don’t associate the biggest with being the best. Let’s look at the car industry. The Toyota brand outsells the Lexus brand. If you didn’t know any better, the salesman could tell you that you should pick Toyota because it sells more. The car industry segments itself so that brands such as Lexus can claim it outsells brands such as Cadillac and Mercedes-Benz. I will leave it up to you to decide which brand you would rather have.
Has your 401k provider reviews been framed?
Let’s assume you are a good parent. You want the best for your child. Would you evaluate high schools based on their college placement or how many children went to the school? Behavioral economics highlights that often our conclusion or decision is based upon how the question was framed. It is often comforting when we hear firms tout the number of clients or the number of assets they have under management. Thinking quickly we can conclude that they must be good because of these impressive client numbers. In retirement plans, another metric to consider is the average balance per participant. There are many plans with hundreds of millions in assets whose average participant balance is less than plans with less than 1 million in assets.
What should the basis of 401k provider reviews be?
As a 401(k) plan sponsor, plan administrator or other responsible plan fiduciary you are to make decisions that solely benefit your employees. If you are a normal person in authority at your firm, you are used to employees working for your benefit or the benefit of your firm. This is the one area where the script flips. While it may be convenient to find a large brand-name provider that bundles all services into one that may not be in the best interest of your employees. In fact, if your bundled services include investments offered by the same 401(k) administration company there will always be the possibility of a conflict of interest between that company and your employees.
The 401(k) watchdog, The Department of Labor, says that the purpose of your company-sponsored retirement plan is to help them retire. Anything associated with the word benefit should be a help. The basis of selection should be their ability to help you get your employees on track and stay on track to retire. Your provider size may help or hinder that goal. Based on the retirement crisis highlighted in the media the wheels are generally off the track.
What are some key metrics for your 401k provider reviews?
The Save More Tomorrow Program1 provides three key plan health metrics which I have incorporated into my keys. That being said these questions will help evaluate the ultimate purpose:
- What percentage of your employees are on track to retire at their normal retirement age?
- Are 90% of your employees participating?
- Is the average deferral rate less than 10%? Any matching contribution you provide should be gravy and not the core of their retirement savings.
- Are there investment returns consistent with the S&P 500 or another benchmark? A more elegant approach would blend the S&P 500 with a bond index, say in a 50-50 proportion.
- If not, are 90% enrolled in professional managed portfolios?
Feel that there are other key metrics? Share them with me james.brewer@lpl.com so that we can help others.
1 Learn more by doing a Google Search for Allianz Behavioral Finance or Save More Tomorrow Ted Talk
The Standard & Poor’s 500 Index is a capitalization weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All indices are unmanaged and may not be invested into directly.
(1) The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. (2) Securities and Advisory services offered through LPL Financial, a Registered Investment Advisor. Member FINRA/SIPC. (3) The LPL Financial Registered Representatives associated with this site may only discuss and/or transact securities business with residents of the following states: AZ, IN, IL, MI.
