- Wise Words -
Retirement Planning on Steroids
by rob deichert
Retirement. Getting Really Invested.
This is the second of a two-part article about 401k investing. I strongly suggest you read the previous article because that’s all about optimizing your own 401k.
This article is about taking on a leadership role at your company to help improve the 401k plan for everyone. This is where you will either join or influence the 401k committee. Even if you're an early stage professional you could be on the 401k committee.
Let me set the stage. In my previous article I mentioned that you can’t control the fund choices in your 401k plan in the short term. You also can’t influence who administers the plan, who advises the plan, and how the fees are allocated between the company and the employees. This article will focus on how you actually can have an impact on these macro factors.
First thing you should do is research your company’s 401k plan on Brightscope: https://www.brightscope.com/ratings/ Focus on the design ratings. How does your plan rate? Print it out and save a PDF.
Second thing you should do are some simple fee checks. If your plan has a S&P 500 index fund, check the fee. How does it compare to Vanguard (VFIAX) or Fidelity (FUSEX). I’ve seen "index" funds like this with fees close to 1% which is literally insane. If you have index funds that have high fees this is a potential red flag that other funds have higher than needed fees. Using the example in my previous article. If your fund had a 1% fee, it’s now .65%. Your fee went from eating up 20% of your returns (1%/5%) to 13% (.65%/5%).
That adds up over time and if you don't trust me see what Warren Buffett has said on this subject.
The Retirement Committee - Join Up!
Now that you’ve done a little homework, find out who runs your 401k committee. In my personal experience this is not the most contested volunteer opportunity at a company, but it has some of the lowest hanging fruit to pick.
Low hanging fruit? If you can join or influence them to improve the funds offered or their fund class - you’ll help every single employee who participates in your company save more money. The best part is that they don’t have to personally save more, you’re lowering the fees. Imagine creating a 2 for 1 drink special all the time at your local bar. While it most likely won’t be 2 for 1, it will all add up. It’s the right thing to do.
The benefits for you include meeting other people in the organization who serve on the committee. You will most likely have an investment advisor who will help guide the committee through the fund selection process as well as what fees are reasonable for the various other services a 401k needs to function. You’ll learn more about investing and how committees work and the employees who understand returns and fees will thank you.
Helping You, Your Peers, Your Leadership Team.
If there isn’t space on the committee, I would suggest you ask about what you found with regards to the Brightscope rating as well as the simple index fund fee test. The committee simply might not know or they are not getting the best advice from the investment advisor they’ve chosen. If your 401k plan has a low rating it’s a perfect opportunity to have a chat with the head of the committee. Find out when the last time the 401k plan was put out for bid.
If there is space on the committee then you can directly discuss these concerns with your advisor. There should be regular meetings to review funds and make various decisions. At some point you might be involved in choosing a new administrator and/or investment advisor. In my personal experience, leveraging a great independent investment advisor we reduced the average fund fees by 35% at two different companies. (If you need a recommendation, send Fergus a email and he’ll connect me) The other area to investigate is how much of the 401k plan fees your company pays for versus making the participants pay. My personal POV is that if the company isn’t doing any matching, this is a nice thing they can fund.
Whether or not you join the committee, that design rating, the total plan cost is critical. Companies that offer a 401k plan they have a fiduciary responsibility to ensure the fees are fair and reasonable. What I’ve seen in the past is that a plan is setup when a company is small. As the company grew so did the number of employees and therefore the assets in the plan grew as well. The problem is that those fees were based on a smaller asset base. Think about buying a slice of pizza, more expensive than buying a whole pie but if you can't afford a whole pie well then you pay extra.
A key point to keep in mind around all of this is that usually anything you find that’s suboptimal isn’t intentional on the company or 401k committees part. It’s critical that you keep this in mind because most people don’t like being accused of doing something malicious. There are some chances for edge cases, but I’m not covering those. If you choose to go down the path of getting involved, remember that investing can be intimidating and complex for many people. Most people at your company are not financial experts, if they were they’d probably be working at a financial firm.
For more on retirement topics see my column, "Don't Dream Retirement. Start Saving Today" and for more general investing and money management try these books: "I Will Teach You To Be Rich"; "A Random Walk Down Wall Street" and "Four Pillars of Investing".
Rob Deichert is Founder & President of Deichert Consulting LLC ("DC") a boutique firm specializing in digital marketing, advertising and publishing. The services that DC offers range from Strategy and M&A through to Change Management, Organizational Design and Operational Excellence. Prior to founding Deichert Consulting, Rob held executive positions at AOL, Criteo, Rubicon Project and The Weather Channel.
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