The report, titled “401(K)/IRA Holdings in 2013: An Update
from the SCF,” written by Alicia H. Munnell, analyzes the data from the Federal
Reserve’s 2013 Survey of Consumer Finances (SCF). Although it features a number
of interesting finding, the “missing $273,000” appears to have most caught the
eye of the media.
More intriguing than the number are the components that go
into it. Surprisingly, high fees were not the worst culprit when it comes to
siphoning value out of retirement accounts. In fact, of the four identified
sources of the $273,000 loss, fees contributed the least. And these aren’t even
high fees. Munnell used the average fee as provided by the Investment Company
Institute (ICI). The ICI reports only mutual fund expense ratios, and there are
other (i.e., service provider) fees that may have a greater impact. Using just
the ICI data, Munnell estimated the toll from fees was only $59,000. Leakages
ate up $78,000 while poor savings habits resulted in losses of $136,000.
Munnell sees the negative impact coming from a mix of poor
plan design and public policy. Alan Hahn, a Partner in the Benefits &
Compensation Group at Davis & Gilbert LLP in New York City doesn’t agree
the problem can be blamed solely on poor plan design.
It’s possible that poor plan design is a function of the
economic realities of the plan sponsor. When this is the case, though, the
impact may be limited to company owners and other high-paid executives. Many
others feel plan design is the critical first step towards improving retirement
readiness. Poor plan design can actually work against the need for employees to
save. Indeed, traditional plan designs – those created around investment
products rather than savings strategies – may often send the wrong message
regarding the priority of saving. Worse,
poor plan design relies too heavily on employee education to overcome the
savings obstacle it represents.
The potential for plan sponsor fiduciary liability regarding
investment selection may have been one reason why traditional 401k plans
emphasized investing over saving. Employees, who previously had the comfort of
merely “counting their money” with profit sharing plans that were
professionally managed portfolios tailored specifically to company
demographics, now found themselves as deer thrust into the headlights of making
their own investment decisions. It was a responsibility few were confident
enough to undertake and fewer still were competent enough to take on.
Robert M. Richter, vice president at SunGard’s Relius in
Jacksonville, Florida, cites two general categories of poor plan design. The
first is the plan’s features. Poor designed features are readily seen
discouraging savings. The second – the number of options on the plan’s menu of
investments – is the more subtle and, for a long time, was viewed as a
positive.
A 401k plan is supposed to represent a bridge to the
employee’s retirement future. Poor plan design often makes the plan a bridge to
nowhere. Munnell’s work shows the dollar cost of poor plan design, specifically
by identifying the impact of leakage and lack of savings. Industry
practitioners see first-hand and even name the suspects responsible for these
negative results. This same hands-on experience compliments Munnell’s
theoretical perspective and can offer testimony as to what plan sponsors can do
to avoid poor plan design. But first, we should take a look at exactly who is
responsible for plan design in general.
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