Should your 401k or 403b be judged on how well it delivers retirement readiness or on the process surrounding your decisions? I don’t know any company that pays its employees for process vs. outcomes. Let’s say that your division doubled its sales goal with a bad process. Your sister division missed its goal but had the superior process. Your boss says, the sister is getting raises because of it and your team will have to try again next year. Right.
That is why I believe as a practical matter the 401k fiduciary should make it about their decisions based on results of employee retirement readiness. Today few plans have any goals for the outcomes of their employees. How can you judge if your providers, fees, etc. are any good without a feedback loop?
Retirement readiness goal
Let’s say you choose a goal such as 70% of the employee being on track to replace 70% of their final year’s income. That requires one of your providers to calculate that number. An advisor working with the employees would be in the best position as they can detect outside assets and whether they should be factored into the plan. That advisor would help employees fine-tune their decisions on how much to save, for how long and at what rate of return to achieve the 70% replacement of their final year’s income.
Retirement readiness defense
The Department of Labor has publicly stated that their goal is a dignified retirement for all American workers. If 70% were on track, you could argue with the DOL investigator or in court that the fees paid to the current service providers were worth it. If you were not on track, you could then look at the investments and the service providers to see if their fees or services were in-line. Let’s start with the services.
- Do you have an advisor that is a fiduciary to the plan that acts as your plan architect?
- Do you have an advisor that works with the employees?
- Do you have an investment manager that takes liability for your investment menu? If so, skip to question
- Does your record keeping service provider limit your investment choices?
- Do they provide access to a full suite of low cost individual investments?
- Do they find it is difficult to find risk based or balanced investment choices with good risk return performance?
We’d love to hear your thoughts. Email your comments to james.brewer@lpl.com. Because of spam and financial industry regulation issues, I have disabled the comment section.
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