Many people assume that the bosses, the plan sponsors, knows more than their employees. After all, that is one of the reasons that they are the bosses. While that may be true regarding the business function, say marketing, production, etc. does that advantage extend to 401(k) investing?
401(k) savings same limits for plans sponsors and employees
A 401(k) is governed by Employee Retirement Income Security Act. The plan should pursue the retirement income security of its employees. That pursuit includes a combination of savings and investments that are given certain tax advantages. The cap for 401(k) savings is the same for owners and employees.
What are the plan sponsors’ responsibilities?
While the plan sponsor is the company, in a small company setting, that means owner or the partners. The sponsor’s responsibility is to keep the interests of the participants ahead of their own interests with all plan decisions. While they may want special treatment, legally they cannot have plan investments that they keep to themselves.
Plan sponsors are wise to hire a specialized 401(k) plan advisor. That individual should not only acknowledge being a fiduciary in a contract, but also have a plan designations such as being an Accredited Investment Fiduciary®, Professional Plan Consultant™, etc. Historically anyone who had been registered to sell securities can hold themselves out as a plan advisor. This led some unsuspecting plan sponsors to pick advisors that had no specific knowledge of the Employee Retirement Income Security Act. In some cases, those advisors are more interested in assets under management than helping the plan sponsor carry out their fiduciary duty.
What are the plan sponsors’ personal returns?
I have highlighted from an investment standpoint some 401 (K) plans appear to be hurting rather than helping investors (See Investment advice nets $198,000 vs. $100,000. Luck or skill?). My evidence of the personal return challenge of owners and partners comes from my experience discussing plan issues with them. In some cases, I have seen the owner pursue buy high and sell low as they invested emotionally. In other cases, I have seen them invest in the very same target date strategies that they defaulted their employees into. In that instance, they were getting the same return as the employee.
In another situation, I saw partners of law firm hire an outside a financial advisor to help them with their individual investment accounts. While they thought that increased their return, I could show that they were doing worse than the market benchmark.
As a CERTIFIED FINANCIAL PLANNERTM professional I believe that the best way to measure personal return is against the actual return that one needs for their own retirement income security. I have yet to find a plan sponsor representative who has done a personalized retirement needs assessment. This needs assessment involves determining how much one needs to save as well as what investment return they need to pursue.
What is the plan’s return?
One of the best practices highlighted by the Center for Fiduciary Studies is to establish a base plan investment benchmark. This investment benchmark should be compared with the actual returns the participants in the plan are getting. If they are not getting a comparable return, then either there needs to be more investment education advice or make changes to the plan’s investment menu. I have yet to run across a plan sponsor that was doing this comparison.
What’s next for plan sponsors
While many people tend to focus on investment returns in isolation, a savvy retirement investor focuses on trying to achieve the return their retirement assessments as they need. I haven’t found many people who have attempted to or hired someone to create a retirement needs assessment. Rather than be concerned about the issue of plan sponsors versus employees’ investment returns, it is more important that each participant pursue the return that they need.
To learn more, contact us to help you better understand the credentials of your current advisor and options for helping you provide retirement assessments for all participants.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All investing involves risk, including possible loss of principal.