This is going to sound a bit like a rant, and I don’t mean for it to. But one of my pet peeves is when we call our 401(k) committee an Investment Committee rather than the Retirement Plan Committee. It seems like a small point of semantics, but words are important, and to me this difference is not inconsequential. Calling it the investment committee suggests that investments are the only order of business and shifts the responsibility away from addressing the larger issue of overall plan health and plan design.
Think of it this way. An appropriate way to evaluate the success of a college or university (and this is on my mind right now as we move both kids off to college) is to look at the school’s graduation rate. As the graduate of a university with a solid football program, I wouldn’t mind evaluating the success of a school based upon the win-loss record on the football field, but as the parent of college students, I think about other things that are more important to define the SUCCESS of a school … like the graduation rate.
Why doesn’t it also makes sense that we should evaluate a retirement plan based upon the retirement rate just like we evaluate a school based on its graduation rate? To be honest, perhaps some plans (and some plan providers and some plan advisors) are a little afraid of asking that question. But helping employees retire well is the entire point of even providing the retirement plan.
So what’s the big deal with calling it an investment committee and not a retirement plan committee? SPOILER ALERT: the investments are the least important factor in determining successful retirement outcomes according to the ASPPA Study on Retirement Success. According to ASPPA, the biggest driver of retirement success (accounting for 74% of the impact) is the savings rate. The investments (asset allocation and asset quality) account for only 22%. (The other 4% is actuarial assessment and intervention.)
In other words, HOW MUCH employees save in their 401(k) is a much bigger factor in determining success than WHERE they invest those savings.
Ironically, that same ASPPA study revealed that the investments get most of the attention by plan fiduciaries. Committees tasked with improving plan success are focused least on the participation rate (how many employees are actually participating) and on the savings rate (how much the employees are actually saving). Talk about missing the point!
By the way, the participation rate ought to be as close to 100% as possible (and anything less than 90% is cause for alarm) and the savings rate ought to be as close to 15% as possible (and anything less than 10% means the employees may not be able to retire).
Too many committees spend too little time talking about these measurements of plan success and too much time talking about the returns of the investments.
And the biggest irony is that even when the committee does examine investments, chances are that the committee is spending too little time evaluating the investments that actually count (meaning the investments where most of the employees are invested).
Increasingly, retirement plans are using some type of default investment, hopefully an investment option that qualifies as a QDIA, like a Target Date Fund. If the plan has default enrollment there could be 90-95% of the investments directed towards these TDFs, and yet very few committees spend 90-95% of the investment portion of their meetings discussing TDFs. The rise of auto features (auto-enrollment) places greater emphasis upon the scrutiny of the QDIA.
The typical committee agonizes over the core investments where 5% or less of the employees are actually invested and little time if any properly evaluating the TDF where 95% of the employees and potentially 95% of the assets is held.
Any wonder why we’re facing a retirement crisis in America? Some of these “programs” should be placed on probation. Some should actually receive the “death penalty.” And many of their “coaches” (READ: advisers or insurance brokers) should be fired. Period. The win-loss record simply doesn’t warrant renewing their contract.