The 401(k) has become the main retirement savings plan for many Americans. As such, it is important to both employees and the sponsoring organization that they have access to a solid plan that offers participants the opportunity to amass the money they need for a comfortable retirement. With that in mind, here are five characteristics of a good 401(k) plan:
An active and engaged investment committee. In small- to mid-sized plans, an investment committee might consist of an owner and several members of senior management. In a larger plan the committee might be a bit larger. Whatever its size, this committee should take its role seriously, and have the final say on all aspects of the plan, including the investment menu, plan design issues, and all outside vendors. The committee should hire outside experts, such as consultants and financial advisors, as needed.
An investment process. This is the major fiduciary activity of the sponsoring organization, usually done by the investment committee. A plan that simply accepts the investment menu offered by the plan provider is hardly acting in the best interests of the plan participants. The fund company or insurance company providing the plan is not a fiduciary; it is often in their best interest to load a plan with their own proprietary funds. A well-run plan starts with a written investment policy statement (IPS) that acts as the foundation for managing the plan going forward. The best plans have an ongoing process to review expenses, the investments offered, and the outside vendors being used.
A menu of well-diversified investment options. 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 solid investment choices, selected and monitored in accordance with the IPS. Balanced options, lifestyle, or target date funds that allow the participants to delegate the allocation of their assets can also be included. However, these options should be scrutinized, monitored, and reviewed in the same manner as the other plan investment options. The preferences of the committee (on behalf of the plan participants), the company's census demographics, and other factors, should govern the composition of the plan's investment menu.
Low expenses. The plan sponsor should ensure that the expenses incurred by the plan, especially those that are paid by the participants from their accounts, are reasonable. This includes expenses associated with record keeping, administration, custody, and, of course, investments. 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 account 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.
Easily accessible investment advice. Participants are hungry for help in investing their retirement plan assets. Education is great thing, but access to direct advice from an unbiased source is critical. A number of plans, large and small, offer participants advice—let's hope this trend continues.
It is in the best interest of organizations offering retirement plans to ensure that their plan offers a solid benefit to their employees. Not only is there a fiduciary obligation on their part, but a solid retirement plan can be an excellent way to attract and retain the best employees.
Plan participants: if your company's plan is lousy, let your employer know. Voice your concerns in a constructive manner.
Roger Wohlner , CFP®, is a fee-only financial adviser at Asset Strategy Consultants, based in Arlington Heights, Ill., where he provides advice to individual clients, retirement plan sponsors, foundations, and endowments. He recently cofounded Retirement Fiduciary Advisors to provide direct investment and retirement planning advice to 401(k) plan participants. Follow Roger on Twitter and LinkedIn.