My last post discussed some really sub-par 401(k) plans. I’ve also been fairly vocal in discussion groups on LinkedIn about some of the issues and problems I see in many plans.
So what does a good 401(k) plan look like? Here are some of my thoughts based upon my experience as a consultant to a number of small to mid-sized plans (typically in the $3 million to $75 million range). Some of the characteristics of good, well managed plans are:
An active and engaged Investment Committee is essential. Several committees I deal with are comprised of the company chairman, president and the top financial executive. One committee is made up of the president, the senior finance and human resources executives, as well as three members of the union from the company’s manufacturing operations. What these committees have in common is an interest in the plan and a desire to offer a top-notch plan for their fellow plan participants.
An investment process governing the management of the plan. The major piece of this process is a written Investment Policy Statement (IPS). Think of the IPS as the “business plan” for the 401(k) plan. Included in a good IPS are things such as a definition of the types of investment vehicles permitted; asset classes to be considered; criteria for the selection of the investments offered; criteria for monitoring those investments; a process for the review and possible replacement of any investments that fall outside of acceptable criteria. Additionally the IPS should specify that the Investment Committee will review expenses associated with administration, custody, and related services, as well as the quality of those services.
A well-documented investment process does two things. First it is a vehicle for the plan sponsor to document that they are running the plan in a fashion consistent with their fiduciary obligations. Second, this type of process, if followed, will ensure that there are solid investments being offered and that expenses are being reviewed.
A menu of solid, well diversified investment options is offered. A provider can offer the greatest website and all of the bells and whistles available, but at the end of the day what really matters is that the participants have a diversified menu of very solid investment choices that are selected and monitored in accordance with the IPS. The investments should cover most or all of the nine Morningstar domestic style boxes as well as at least one fixed income, money market or stable value, and at least one international equity choice. Balanced options, lifestyle, or target funds that allow the participants to delegate the allocation of their assets should also be included. These choices should be scrutinized, monitored, and reviewed in the same manner as the other plan investment options. Depending upon the preferences of the Investment Committee, the company’s census demographics, and other factors, options in other assets classes might be included as well.
Overall plan expenses are monitored and controlled by the investment committee. Investment expenses are an obvious aspect of this, but the plan sponsor is responsible for all plan expenses. This also includes all expenses associated with record keeping, administration, and custody. The sponsor should know what is being charged for all services and how these total expenses compare with plans of a similar size. If there is revenue sharing involved, the plan sponsor should receive a full accounting at least annually of all revenue sharing paid to the plan provider and how that revenue sharing was spent. This is after all the participant’s money, accounting for these dollars is a fiduciary obligation of the plan sponsor.
In the future hopefully plans will offer their participants the option of having an unbiased, unconflicted Fiduciary Advisor manage their individual 401(k) accounts. This goes far beyond the education currently offered by some plans and, in my opinion, gets to the real heart of what participants need.