A Vanguard published report found that the average participant deferral rate matched the historic high of 7.4% in 2023. When combined with employer contributions, the average participant’s savings rate kept pace with the all-time high of 11.7%, reached in 2022.
Any news like that is good news. A record high is good news. It should be better and get more people to save for retirement.
For about a 25-year run, mutual funds dominated the 401(k) market, but signs are changing. A recent Cerulli report indicates CITs (Collective Investment Trusts) are currently on pace to overtake mutual funds as the most popular target-date vehicle in 2024, as they now represent 49% of the 401(k) market.
It’s an incredible number and probably has to deal with lower investment fees and the ability to negotiate fees. I would imagine CITs are cheaper because of less marketing and overhead by CIT provides. They will get further ground in the retirement plan space when they are eventually permitted in the 403(b) space, which will eventually happen.
The best retirement plan committees I’ve seen are dedicated to the process. That means regularly scheduled meetings, a documented record, and adherence to board policies. I will always say that having no committee is better than having a committee that won’t follow the process it adopted to follow.
Communication is also a key facet of a good committee. Bringing in plan providers to be a part of it, keeps the plan sponsors on their toes in reviewing the plan provider and bringing up issues that need to be addressed.
When you start fixing up the house (for me, a never-ending battle) and replacing appliances or items like the front door or the roof, you realize that the replacements are more energy-efficient. Replacing that old refrigerator or that washing machine can lead to some savings in your energy bills. I was always amazed at how much my heating bill went down with a more efficient furnace, some plywood, and new windows.
When it comes to retirement plans, there are so many of them that are inefficient in either their cost structure or plan design. While cost structure will be all disclosed to plan sponsors (who have the duty as fiduciaries to determine their reasonableness), plan design inefficiency is something that won’t be discovered until the plan goes through an independent review (like my Retirement Plan Tune-Up) or takes the plan to another third party administrator (TPA). Inefficient plan designs come in all sorts, but it wastes money like that 40-year-old furnace I replaced when I bought the house.
An inefficient plan design wastes money because it either makes less cost-effective contributions or it doesn’t maximize tax-deductible contributions to highly compensated employees. So it either wastes money in unnecessary contributions or is inefficient for tax savings.
In terms of wasting money, it could be a defined benefit plan that has outlived its usefulness or it could be a 401(k) plan with a new comparability plan design and a safe harbor matching contribution (because unlike a safe harbor 3% profit sharing contribution, you cannot use the safe harbor matching to offset any new comparability contributions to non-highly compensated employees like you could with the safe harbor 3% profit sharing contribution). A plan that doesn’t maximize contributions could be a 401(k) plan that consistently fails discrimination testing and doesn’t implement a safe harbor plan design or a plan that doesn’t offer a new comparability profit sharing allocation to highly compensated employees when the plan sponsor can afford it.
Retirement plans are a great employee benefit for retirement savings, but you should never forget the tax savings component it has.
So when I consistently state the claim that plan sponsors need to find a quality TPA that is not predicated on price, but predicated on its competency and knowledge of cost-effective, retirement plan design.
When you look for new appliances, you always look for those with an Energy Star sticker. When shopping for TPAs, look for those who would deserve a Tax Star sticker (if one existed, don’t steal my idea!).
I probably have drafted and amended thousands of plans over the years and every plan has its little quirks. When it comes to plan design, I have always believed that some of the bundled providers have it wrong. There is no cookie-cutter approach to retirement plan design; so many plans being handled by bundled providers are underserved because the plan document doesn’t fit what the plan sponsors need or want to do. You’ll have a prototype, fill-in-the-blank document that doesn’t have all the choices that a plan sponsor may want or need. For years, I was recommended by one of the largest plan providers to draft amendments to their prototype documents because up until the EGTRRA restatement documents, they had no provisions for new comparability profit sharing allocation.
That being said, even with prototype and non-prototype, I am often amazed at what provisions that plan sponsors don’t have. I am not talking about required contributions like safe harbor, I’m talking about provisions that are common sense and help facilitate administration. I’m talking about 401(k) plan provisions that plan sponsors eventually end up needing one day they end up spending money to amend the plan to add these provisions. Here are some plan provisions; that I like to see in every plan document:
1. Allowing plan participants to rollover money into the plan and allow them to withdraw it at any time.
2. In-service distribution, allowing plan participants to access their money at age 59 1/2, even if they are still working.
3. Loans, not a big fan of them, but participants may need them for one reason or another.
4. Hardship provision, same view as #3.
5. Discretionary profit sharing and matching contribution provisions. Even if a plan sponsor never wants to make one, I feel having those provisions in there is better than not having a plan sponsor wanting to add them because, with the language needed for an amendment, you’ll need a new document.
6. Roth 40(k) provision. I see no reason for not offering it.
I have been practicing in the employee benefits world for almost 26 years and the beauty of it is that you learn something new every day. The laws and regulations change, attitudes change, and the business is constantly in a state of flux.
Sometimes I am amazed by what I see and some of those things are from first-hand experience. The only thing that I always know about being in this business is that since it’s so tightly knit and people know everyone, your reputation is more important than anything.
This business requires a lot of trust and a lot of faith. Whether it’s working with other professionals or whether it’s using a plan custodian or third-party administrator to handle your money, trust is also an important tool.
We can all talk about fees, how some businesses operate, and whether a bundled product is a good idea for a 401(k) plan, but your reputation means everything.
I remember a person who was in this business for 25 years. While he might have been a miserable person he helped build a large retirement plan business from nothing. How he built is up for debate, but he had a reputation as being very successful in the retirement plan business. After I left, a few years later, he had to retire in disgrace because of the way he conducted his business. So in an instant of greed, a reputation was lost. A reputation that will not be repaired as long as he is banned from ever operating a retirement plan-related business. Despite the way he may have wowed some clients and some business partners, he is a ruined man in the business because he put greed in front of his clients.
We can all debate our views in any forum we choose, but if we have a reputation in this business for cheating clients or doing something improper, we are going to have that scarlet letter in the retirement plan business and you learn very hard that people never forget a poor reputation in this business.
The reason I charge $100 a person (or usually $50 a person if they bring multiple people) to my live events is rather simple. It’s not about drawing money. I want to guarantee attendance. I’ve been to too many events with free registration for attendees, so they would have every reason they could think not to attend and not suffer pecuniary harm.
I will tell you that there is nothing worse than sponsoring an event with food for a maximum of 75 reservations, only for 40 people to show up when it was the event/luncheon. I recently hosted a free webinar on Zoom. There were 125 people signed up and only 40 people showed up. Charge someone a nominal fee, reservations would be down, but guaranteed attendance would be up.
I call it skin in the game. The moment a potential attendee plucks down anything to attend, chances are they will.
As I mentioned elsewhere, I took my daughter on a day trip to FanExpo Boston to meet her favorite actor, Mads Mikkelsen, and other stars including Marisa Tomei and Vincent D’Onofrio (boy did I love him on Law & Order: Criminal Intent). While we were waiting in line for Charlie Cox, my daughter noticed that Bryce Dallas Howard had a small line and since she’s seen her movies and we’re all redheads, she was interested in meeting her.
Bryce Dallas Howard is Ron Howard’s daughter. Yes, my daughter didn’t know who Ron Howard was, but she knew Bryce. All I can say is that Bryce is probably one of the nicest people I’ve met at an autograph signing, up there with Brandon Nimmo from the Mets. If you know the story about Ron and his wife, Bryce being a wonderful person is no surprise. My daughter went up again later to thank Bryce for being so nice and Bryce told my daughter that comment met my day.
All of the stars we met at the show were very nice. Of course, I didn’t pay to see Chevy Chase, he has a reputation for being not-so-nice at times. You need the right temperament to meet people publicly and charge for autographs and photo ops.
I’ve met a lot of great people in the retirement plan industry. On a couple of hands, I’ve met people who are not so nice. I’ve felt it’s easy to be nice, it takes effort to be mean. It takes a lot of work to just offend people. Being easy with people, and trying to develop relationships may seem like work, but being nice is just decent human behavior and I think negativity takes something out of you for showing it publicly.
According to a survey by Principal, 59% of employees who are not contributing to their 401k or other workplace plan believe they are. Another 77% think they began saving after becoming eligible to contribute.
These are incredible results and show a serious lack of retirement planning education and communications among plan sponsors and their employees. It just shows that we have so much more to do as an industry in educating participants.
I have seen so much organization dysfunction in my life and it probably dates back to some of the organizations I was a part of, as a college student at Stony Brook. When you’re 18 to 22, you don’t have the maturity to handle different personalities. All the dysfunction at Stony Brook, law firms, and synagogues have allowed me to finally master committees and the people who serve on them.
People are individuals and need to be managed individually. There are those who want to do well. There are those who don’t. Some just want the title. Regardless, they all have to be managed in their way. You need to understand how each member sits on the committee and how they act. Understanding personalities will go a long way in managing them to effectively manage their 401(k) plan.
