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These 7 Articles Help 401k Plan Sponsors Apply Fiduciary Principles to Build a 21st Century Plan

These 7 Articles Help 401k Plan Sponsors Apply Fiduciary Principles to Build a 21st Century Plan
March 11
00:39 2014

Here it is straight, simple and to the point: a 401k plan sponsor is a fiduciary and must always act within the best interests of the participants of the plan. If it sounds easy, you’ve either been a trust officer all your life or you have a higher 1192806_72189016_vhs_stock_xcnhg_royalty_free_300than average optimistic view on things. Most plan sponsors are (rightfully) more concerned with producing whatever widgets they produce than incessantly monitoring their company’s 401k plan. That’s why they hire expert service providers. Of course, delegating fiduciary duties does not eliminate their fiduciary liability. And depending and which service providers a plan sponsor chooses to hire, that liability may not even be reduced (in fact, it could go up).

The best way to reduce fiduciary liability is by creating or upgrading you plan design to conform to the latest research. With a 21st Century plan design, the plan sponsor creates a framework that, at the very least, makes it more difficult for service providers to increase plan sponsor liability. In addition, it bakes into the cake (an apt metaphor as you’ll soon find out) a process that directs participants to act in their own best interests.

To best understand modern plan design, we must first look at the evolution of the 401k plan since its inception more than thirty years ago. The article “How Investment Theory Explains 401k Plan Sponsors’ Evolving Fiduciary Duties,” (, September 17, 2013) explains to the reader how plan menu design reflects the prevailing investment theory. Chances are you view the “normal” 401k design in terms of what you saw when you first began working in the 401k field. For the oldest folks (many of them soon to retire), they see a 401k plan having three options. For the vast majority of 401k workers, they’ll view the “ideal” 401k as addressing the “Style Box” array of Modern Portfolio Theory. Those newest to the 401k world may wonder why so many haven’t accepted the currently prevailing theories derived from behavioral economics. This article takes you on the journey from the 401k’s beginnings as a “three-ring circus” to its current norm of a “tiered wedding cake.”

Fundamental to plan design – and, quite honesty, probably the part that is the most fun for many plan sponsors – revolves around determining the number of plan options. While this is a critical question, it should only be tackled after the plan sponsor has a thorough understanding of the evolution of education theory. “How Many Investment Options Should 401k Plan Sponsors Offer?” (, October 18, 2011) takes a look at this question from the academic researcher’s eye. This is important because it incorporates the current investment theory into the question. What we find is most plan sponsors – and even some of their employees –would be surprise how small the ideal number of options is.

If you’re like many plans, you may find your plan approaching – or even exceeding – two dozen fund options. As the previous article explains, this is far too many funds. “4 Proven Strategies to Reduce Choice Overload in 401k Plans” (, June 4, 2013) offers a practical guideline on how to decide which funds to cut from your menu. Still, this presents a problem. Plan participants are not one-size-fits all, so it’s difficult to reduce the number of options in a plan based on this assumption. In order to accommodate different types of investors, you may find you want a number of funds well into the teens. Doesn’t this, then, keep up in the realm of too many funds.

Well, yes, but no. There’s a way to have your cake and eat it to. It’s all in how one frames the choices. “Avoiding Decision Paralysis: How to Create the Ideal 401k Plan Option Menu,” (, November 17, 2011) explains how the old-style option menus actually hurt participants. Frankly, there were too many choices and, for many employees, it was easier to simply not opt-into the plan. This article gives “entry-level” answers to the concept that begins to address this decision paralysis.

Before we go there, though, we need to take a look at the whole “opt-in” idea. Prior to 2006, employees had to take a positive action to participate in their 401k plan. In 2006, the Pension Protection Act (2006 PPA) allowed 401k plan sponsors to include automatic enrollment in their plan design. “How to Nudge 401k Participation Higher,” (, November 23, 2010), explains how academic research showed education and focusing on “financial literacy” was starkly less effective than automatically enrolling employees into a 401k plan. The downside to the 2006 PPA, of course, was its explicit endorsement of target-date funds. Among other issues, this relatively new and untested product, unlike the very similar lifestyle fund, failed to meet expectations during the 2007-2009 market drop. (If this digression whets your appetite on this particular investment product, then you may want to read “A Hidden Fiduciary Liability for Plan Sponsors: The Five Most Critical Problems with Target Date Funds,”, September 14, 2010, and “401k Plan Sponsor Concern: Target Date Funds Still Broke,”, January 10, 2012 – but neither of these articles count towards our promised number of seven.)

If you’re really interesting in increasing employee participation, you’ll need to take your understanding of decision paralysis a little bit further. “How Plan Sponsors Can Restructure a 401k Investment Menu to Increase Participation” (, June 5, 2013) looks beyond the mere number of options and suggests other ways to get employees more enthused about joining the plan. Pay particular attention to the item “Make the consequences of their actions more vivid.” This is an under appreciated method to increase participation.

Finally, what better way to end with an example of how to upgrade your plan design? “Adding Categories: A Sample of a New and Improved 401k Investment Option Menu” (, June 6, 2013) takes all the elements introduced in the above articles and takes you step by step through a hypothetical plan design upgrade. It expands on the idea of tiers, what they are, how many there are and how to get employees to use them appropriately.

Radio Shack ran a popular 2014 Superbowl commercial under the theme “the 1980’s want their stores back.” Everyone thought this was funny and cute until, a mere four weeks later, Radio Shack announced they were closing 1,100 stores. (Maybe the 1980’s literally wanted their stores back!)  In either case, if you’re a 401k plan sponsor, you’ve got to ask yourself, is your plan design still from last century? If so, it’s time to get back to the future. And maybe you can get of those old VHS cartridges, too.

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. The book also contains a series of chapters on this subject, including how to create an investment policy statement that defines a set of menu options consistent with the “one portfolio” concept (as well as leaving room for those few remaining do-it-yourselfers).

Mr. Carosa is available for keynote speaking engagements, especially in venues located in the Northeast, MidAtantic and Midwestern regions of the United States and in the Toronto region of Canada.

About Author

Christopher Carosa, CTFA

Christopher Carosa, CTFA


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