Target-Date Funds can be a poor investment “shuttle” for plan participants, as eventually discovered by many employers who act as “Mission Control” for their corporate retirement plans. In meetings with 401(k) and 403(b) plan sponsors, I frequently learn that these employers believe they have successfully launched employees on a flight path toward retirement success by offering a Target Date Fund series in their plan. Unfortunately, plan participants invested in a Target Date Fund can find themselves financially “lost in space” when they retire, due to common misperceptions regarding TDFs, as well as the funds’ complex and often confusing nature. This backfires on the high hopes of employers to assist their employees in preparing for their financial futures.
People often say to shoot for the stars, because if you miss you’ll at least hit the moon - which is easy to say if you aren’t an astronaut! An astronaut would probably tell you that if you miss your target you’re not likely to land on the moon, but in the vast emptiness of space, drifting longer than planned and hoping your supplies will last is hardly a successful mission.
When I visit employers to help them improve their 401(k) and 403(b) retirement plans I often hear them say “We’re just not sure how to get more people to enroll in the plan!” It is a common problem. Pencil and paper at the ready, my trusty binder of go-to resources at my side, I am always ready to help them tackle it.
Sharpened pencil in hand, I step out of my car. Under my arm I carry my binder with helpful retirement plan information and go-to resources. I have just pulled up to a corporate office suite, having recently disembarked from a meeting with another company owner nearby. I remember the smile of gratitude on his face just an hour earlier as I showed him ways to improve his company’s 401(k) plan with lower-cost investments, as well as save valuable time for his staff by making plan administration easier. The knowledge that these meetings are a genuine help to others is like a fresh breeze in my sails, reinvigorating me and propelling me forward to new explorations with other retirement plan sponsors.
Every year in Mexico around December 16th, in a tradition four centuries old, townsfolk begin the nine-day celebration of Las Posadas. This celebration features a dramatization of the Christian nativity, as well as the omnipresent and iconic piñata in the shape of a seven-pointed star. Historically, the seven points of the piñata represent the seven deadly sins, and the goodies inside represent a reward for fidelity to advised virtues.
“Fiduciary” is a word used frequently in the retirement industry, often to the confusion of plan sponsors and participants. “We have a fiduciary,” some employers tell me when we sit down to talk about their plan. “I am a fiduciary, and I have a fiduciary,” others will say. “We were issued a fiduciary warranty by our provider.” And so forth.
That’s how our discussions on fiduciaries often begin. When we dig in to the specifics of the financial services their hired “fiduciary” offers (and does not offer), many employers are surprised to learn that – contrary to what they were led to believe – their fiduciary does not reduce their responsibility or potential personal liability for selecting or monitoring the investments in their company’s retirement plan.
Once upon a time, there was a busy company manager named Goldilocks who was lost in the woods of deciding which ERISA bond was right for her company’s qualified retirement plan. She knew that her Worker Bees had to be well protected, but she also knew that it was hard for her to resist a sale!
Enchanted by the idea of a bargain, her curious eyes came to rest upon the Wee Bond. “I’m not sure if it’s the best fit, but it’s so affordable!” she said.
Just as she was about to purchase the Wee Bond, a wee warning tag appeared with wee writing – writing that was so small that she almost missed it in her excitement! The print read, “This Wee Bond has a wee price, but beware - it won’t cover all your Worker Bees!”
This witch's brew of hidden fees, conflicts of interest and complexity in applications is at odds with investors' best interests.
- SEC Chairman Chris Cox, speaking on retirement plans
When I sit down with employers to talk about their defined contribution retirement plans – 401(k) and 403(b) alike, they often tell me how their decision to go with X or Y Big-Brand recordkeeper was fueled by their wish to avoid toil and trouble – in particular, high fees and legal liability! Most commonly, X or Y Big-Brand recordkeeper has a national media footprint, and the understandable human tendency to believe that “bigger is better” is at play, at least subconsciously.