Kitchen Temporarily Closed for Remodeling
Posted by Tammie EldredJan 7
HR Gumbo
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Is Participant Choice a Good Idea in a Retirement Plan?
Posted by Tammie EldredFeb 12
The mainstream media has often commented on the shift from defined benefit plans to defined contribution plans over the last few decades (see PBS FRONTLINE report). But there has also been a shift within defined contribution plans from “trustee” directed “pooled” accounts to “participant” directed “individual” accounts.
Years ago it was commonplace for employers to sponsor a “pooled profit sharing” plan. Each year the employer would determine how much to contribute and these contributions were held in a single account. The employer would appoint a trustee and/or investment manager to determine how to invest the contributions on behalf of all participants.
Then came the rise of the 401(k) plan. For some reason in a 401(k) plan it was decided that participants ought to choose their own investments. At the meetings I attended where sponsors contemplated adding a 401(k) provision, the logic went something like this: because participants would see the money come out of their paychecks they will want to be (and perhaps ought to be) more involved in the investment decisions.
We have moved from a situation where employees didn’t have to make any decisions, or have any choices, about retirement savings (e.g. the traditional DB plan) to a situation where employees have all the decisions, and have perhaps too much choice (e.g. today’s typical 401(k) plan).
Is this good or bad? As with any most questions, there isn’t a simple answer. However, some additional background might be helpful.
As most HR professionals know, getting participants to pay attention to their retirement plans can be tough. Aside from the few people glued to the web watching their account balance go up and down, the majority are not very involved. Why?
Deloitte conducts an annual 401(k) benchmarking survey. In these surveys, employers consistently report that the biggest barrier to plan participation is a “lack of employee understanding.” Similarly, employees most often report “Where to invest/which funds to use” and “How Much to Save for Retirement” as the more confusing parts of their retirement plans. While automatic enrollment features and default investments may alleviate some of these problems, they are not perfect solutions (see a related blog post on automatic enrollment).
So what about the participants who do get involved? How well do they perform?
Unfortunately, the answer is that they do not perform well. The Michigan Retirement Research Center published a working paper in which they analyzed a rich set of participant account data from Vanguard. They found that most “real-world” participants make mistakes by investing inefficiently and not diversifying their investments enough. In fact, participant investment mistakes account for the majority (76%) of their poor investment performance. These investment mistakes have a significant impact on retirement savings, reducing wealth by 1/5th over a 20 year career.
Given that many participants don’t want to manage their own retirement accounts, and those that do often make big mistakes, why would an employer give control to participants?
Unfortunately, some retirement plan providers told employers that by handing over investment choices to participants they rid themselves of fiduciary responsibility. While correcting this fallacy is beyond the scope of this post, you should know that the employer can never entirely eliminate their fiduciary responsibility. In fact, improperly transferring control to participants can even lead to greater responsibility.
Does this all mean that participant choice is a bad idea? Yes, many times it is. However, for many employers taking away this choice is just not feasible. If you must offer participants a choice, do it right:
- Have a well chosen list of investment options covering all asset classes.
- Use no more than 9-12 funds (studies show having more funds can lead to more investment mistakes).
- Consider having participants select between pre-mixed model portfolios instead of individual mutual funds.
- To the extent you provide investment education, focus on answering the basic questions: How to enroll in the plan?, How much to save? and Where to invest?
- Provide employees easy to use savings guidelines when they enroll in the plan (try the FPA Journal – National Savings Rate Guidelines for Individuals).
- Periodically review participant asset allocation, individual investment performance, and retirement readiness. You can’t manage what you don’t measure.
Kevin Boercker is a credentialed member of the American Society of Pension Professionals and Actuaries (ASPPA) and holds the Qualified Pension Administrator (QPA) designation. Prior to joining Spectrum, Boercker graduated with Phi Beta Kappa Honors from Washington University in Saint Louis with a bachelor’s degree in Applied Mathematics.
Happy Regulated Holidays
Posted by Tammie EldredDec 22
I have heard a lot of talk about how grumpy people seem to be at work this holiday season. I do not necessarily think that is an unusual observation. Each year, the day after Thanksgiving begins an influx of stress as we enter the holiday season, regardless of what you celebrate. Gifts to buy, lines to wait in, food to make, parties to attend and relatives to avoid…on top of all of the end of the year deadlines to meet at work. Think Clark Griswold in National Lampoon’s Christmas Vacation.
The complaints that I have heard most recently relate to regulations that are communicated within organizations around the holidays regarding “proper” conduct. Most often the regulations include comments about holiday décor, inter-office parties, gift exchanges, etc. Rightfully so, there is a big focus on diversity. In my opinion I believe the grumpiness may be a reaction to how the official “regulations” are communicated within an organization rather than that they have been developed.
I believe most people understand the importance of respecting diversity during this time of year. However, if the regulations on “proper” conduct are communicated in a negative manner or in response to someone being offended then there is a guarantee that they will ruffle some feathers.
I recently talked with a colleague who works in the public sector about a specific regulation that was released just as holiday decorations were being hung throughout the office. Depending on how much time an individual spends with the public (employees), the individual is held to different standards than all others. The idea seems to stem from the fact that due to the high degree of public relations involved with a position the individual is responsible for ensuring that any holiday decorations within their personal office do not reference a specific religious holiday. In some cases I have even heard of not referencing any specific holiday in general, non-religious Christmas for example. In this case hanging up a wreath or snow flakes is acceptable. A tree however, not so much.
I understand people have varying religious belief and that we should be respectful in these types of situations. Nevertheless, it bugs me when organizations get extremely “nit picky” when it comes to the holidays. I am not a religious person but I have been offended in years past by the way organizations have dealt with the holidays. This is supposed to be a joyous time for all – not a reminder that we are just cogs in a machine.
What do you think? How does your organization handle the holidays? Are they flexible or do they follow strict protocol?
Stephen is the 2009 President of Big Bend SHRM and the founder/creator of HR Gumbo. He is an operations and people manager with a passion for social media and relationship development. As a proud member of Generation Y, Stephen has worked diligently to bring Big Bend SHRM to the next level – one of the most progressive SHRM chapters in the state of Florida. He is currently an HR Specialist in the public sector in Tallahassee, Florida. @stevemgharrison