Our Retirement System Isn’t Working the Way It Once Did
The retirement system in America presents real challenges to both plan participants and plan sponsors. It’s probably time that we talked about it.
Years ago, people could rely on their company’s pension plan to provide a comfortable retirement, but those days are long gone. The newer defined contribution system shifted the burden of planning for, and funding retirement, away from corporations and placed it squarely on the shoulders of American workers. You could argue that it’s not enough, but you can’t argue that there aren’t plenty of investment options to help retirement savers reach their goals. These options, however, can only be accessed through a complicated maze of a system that is difficult to navigate for both plan sponsors and plan participants. And I would argue that the current state of affairs isn’t serving either of them very well.
I have worked in the investment industry for over two decades and during that time I have absorbed a solid understanding of how the system works. And I still found myself getting short end of the stick when, as the result of a merger, a former employer changed their 401(k) plan administrator. I had my entire balance in an S&P 500 index fund, which was my choice. I received a letter from the plan telling me that I needed to make an investment election for the new platform and as I thought I had done that already, I put it aside with the intention of getting back to it. But I never did.
That notice came in March of 2020, just a few days before I abruptly left my home in New York City in the midst of the Covid-19 pandemic. It was left behind, and subsequent notices sat for weeks in an overflowing mailbox. By the time I realized the new plan administrator had divested me from my index fund, and placed me in their default option, a target date fund with a much higher fee, I had missed out on much of the stock market run up in April of 2020. My 401(k) balance was a lot less than it should have been. I was furious. I felt it shouldn’t have happened.
While I caught it relatively quickly and shifted my allocation back, it got me thinking about the teachers, doctors, construction workers, lawyers and plumbers. All of these hard-working Americans, who often aren’t savvy in the realities of the investment industry. Would they have caught this as quickly as I did? Would they have been paying as much attention as I was? They probably wouldn’t have. The retirement system has become so overwhelmingly complex and too often, the overwhelm can lead investors to avoidance. And that can lead to bad outcomes.
But plan participants aren’t the only ones who can be overwhelmed by the retirement system. Plan Sponsors have an awful lot to contend with as well. Consider this scenario: One firm gets acquired by another and as a result, the retirement plans are merged. The individuals serving on the retirement committee (often the named plan fiduciaries) are likely a mixture of internal executives with great skill in their fields. Perhaps an HR professional, a General Counsel, a CFO and maybe a CEO. These are busy people trying to run a business and they have an awful lot on their plates. Then consider that they also have to oversee the retirement plan for their employees, and they are personally liable for the decisions they make in that capacity.
Overseeing a retirement plan is a business unto itself that can siphon company resources away from managing the underlying business. It’s not hard to see how important things could get overlooked. But when it comes to the stewardship of participant retirement savings, nothing should be getting overlooked.
If you sit on your company’s retirement committee and you are a named fiduciary for a plan, there is a long list of things that you need to not just be familiar with, but that you need to be expert in. First and foremost, ERISA and all its very specific and not so specific requirements. Then there is the increasingly complex investment landscape that you’ll need to navigate, including understanding and analyzing fee structures and expenses for investment options and for every vendor. Throw some Target Date Funds into the mix and you’ve got yourself a full-time job on top of the one you already have. And there’s more; retirement plan cybersecurity is a dangerous landmine that threatens retirement plans and it’s only getting trickier. Also, do you understand the implications of adding alternative investment options to a plan and do you possess the skills to dive into that adequately? If you don’t you need to get them. How about cryptocurrencies like Bitcoin? Should they have a place in your plan? And if not, do you understand why? And have you documented it adequately?
This sounds like an awful lot, because it is. As a committee member, you may be comforted by the team of advisors and consultants that your plan has engaged to help you. While that’s a bonus, have you asked them where their fiduciary responsibility starts and stops? Unless you’ve appointed a third-party independent fiduciary, the buck continues on past all of them and stops with you. So you’ll want to know what they are doing and understand it. While you’re at it, familiarize yourself with any conflicts of interest they may have. Those could come back to bite you.
Once you are comfortable that all of your ducks are in a row with the plan that you are personally responsible for, then you can go back to your day job and make sure that company is running as it should. Or do you do that first?
Plan sponsors who are overseeing their retirement plans internally are often doing so because that’s model that we’ve all become accustomed to. But the landscape looks different today than when defined contribution plans first became the norm. ERISA class-action lawsuits against plan sponsors have risen exponentially, and the increasingly complex investment landscape makes the waters much more difficult to navigate.
I wanted to share my story because the vast majority of people in 401K plans aren’t paying nearly as much attention as I was. Until the system evolves to adequately address prudent retirement plan fiduciary oversight, participants need to pay much more attention.
And given how quickly the landscape has changed, and is changing, perhaps we will start to see plan sponsors realizing that status quo of managing their retirement plans internally, isn’t really working as well as it once did.