Three Outside-the-Box Tips for 401k Plan Sponsors

What’s up with the number three? It’s everywhere, and that’s even if you remove every clock in the universe. There’s three strikes and you’re out. There’s three outs and the inning’s over. Heck, there’s three good pitchers in most rotations (which has been a problem baseball general managers have been trying to solve since Abner Doubleday did whatever he did – which most definitely was not invent the game of baseball). But, who cares about baseball… (See, there’s three dots in an ellipsis)

Football is might sport of choice, and, this being the week we kick-off the new season, it would be remiss to fail to point out there are three points in a field goal, three-yards and a cloud of dust, which usually means three downs and a punt. Hmm, come to think of it, every great list contains three points.

Speaking of new seasons, a long time ago it seemed 401k plan sponsors tended to choose between two months to revisit the basics of their plan – September and January. Who knows why, but, this being the first week of September, it’s like it’s the start of a new season for 401k plan sponsors. What better way to commence festivities than by offering one of those much-heralded lists of three?

In this case, though, we’ll be thinking outside the box. None of that usual pabulum here! Instead we’ll feature three hot-diggity, slap-across-the-side-of-the-head, kick-in-the-seat-of-the-pants tips that, quite frankly, aren’t for the faint hearted. In fact, there’s no doubt some 401k plan sponsors might just be shocked to read these. Stay calm, though, for all these tips have an impeccable academic pedigree (which means research within ivy-covered walls has demonstrated the veracity of these ideas).

Without further ado, let us begin:

1. Cut the number of investment options in your plan by half. If you operate a typical plan, you’re dumping more than a dozen different choices on your employees all at once. Give them a break. They work for a living (or so you hope). Don’t make investing in their retirement more work for them. Countless studies have proven folks just plain clam up when confronted with too many options to choose from. Make life easy for them. Give them less to choose from.
2. When presenting investment performance for long-term options (which should be most of the ones offered in your plan), emphasis rolling 5-year performance. Why 5 years? Because that’s the minimum amount of time most professionals consider “long term” and because it allows those one-in-a-million performance years that tend to skew 10-year or since inception returns to roll out quicker. But the most important reason is to avoid unduly emphasizing short-term volatility that longer holding periods tend to dampen down. Research shows, when presented with the ragged chart of volatile one-year returns, 401k investors tend to investment more conservatively than they should. They have a lifetime to grow their retirement nest egg. Encourage them to do so by framing investment performance in a more useful – and less misleading – manner.
3. Nuts! We just wasted two of our three wished on investment related items. They’re not even the most important factors that lead towards a great retirement. That brings us to our final tip: stop advertising investments. Retirement plans aren’t about investing (although investing is a byproduct), they’re about saving. When you offer those general education sessions, make sure at least three-quarters of the time is spent on showing those wide eyes in attendance why saving is the most influential component that determines whether or not they will retire in the lifestyle they desire. Tell participants that using their 401k plan is not rocket science, it’s simple math: the more you save today, the better off you’ll be tomorrow.

There you have it. Three fabulous tips that state what should be common sense (and, given the sophistication of our readership, it probably is for you). But, even if you are that rare fiduciary who, at this point in the story exhales triumphantly and exclaims, “I already knew that,” don’t let this wisdom wither on the vine just because you’ve already tasted its fruit. No, instead, use this opportunity to provide a helping hand. Take a moment and e-mail a link to this article to three of your favorite people. Remember, good things always happen in three.

Interested in learning more about this and other important topics confronting 401k fiduciaries? Explore Mr. Carosa’s new book 401(k) Fiduciary Solutions and discover how to solve those hidden traps that often pop up in 401k plans.