I admit it. I’m a week or so early for the Vernal Equinox. This year it falls on March 20th, marking the first day of spring. With spring comes the inevitable urge to clean. Clean the attic, clean the garage, clean the yard, clean whatever stands in the way between the gray ruin of the winter past and the bright sunny joy of the coming summer. What applies to household just as fairly applies to our workplace. And within our workplace resides our most favorite of things: the 401k plan.
If you’re looking for a quick compendium of the how’s and whys of giving your 401k a spring cleaning, then turn to “These 7 Articles Help 401k Plan Sponsors Apply Fiduciary Principles to Build a 21st Century Plan,” (FiduciaryNews.com, March 11, 2014). This compendium of articles reads like a virtual ebook and lays out all the basics for updating your 401(k) plan.
But why go through the trouble now?
A lot has changed since the inception of the 401(k) some thirty years ago. Unfortunately, many plans still reflect 1990s thinking. They fail to take advantage of the advances in research that make 401(k) plans easier to use and help plan participants make more appropriate decisions.
Think about it this way: how many of you are still driving around in cars built in the 1990s? Heck, that was three presidential administrations ago.
Now, I know what you’re thinking. You’re saying to yourself, “I might be driving a different car, but I am living in the same house. Isn’t a retirement (a.k.a. long-term) investment more like a house than a car?”
Well, in a way, you’re right. Notwithstanding the irrelevance of planned obsolescence (which is more pertinent to cars than to 401(k) plans), the metaphor of duration is less relevant than the metaphor of newness. The 401(k) is a relatively new invention. It’s as old as the personal computer. So, let me put the question to you this way: “How many of you are still using a computer built in the 1990s?”
Here’s what we know. Retirement plans have been developed for the benefit of the plan participants. While the industry focused on investments, investment platforms and investment theory, what the first decades of the existence of the 401(k) taught us was plan participants made three mistakes:
1) They didn’t participate.
2) When they did participate, they didn’t save enough.
3) When they do save enough, they tend to invest too conservatively.
Since the turn of the century, there’s been a proliferation in academic research, much of it seeking to find ways to rectify these three common participant mistakes. In the last few years, we’ve seen new plans and plan redesigns that reflect the fruits of this research. For example, auto-enrollment and tiered option menus are fast becoming the norm. And auto-escalation isn’t far behind.
So, I repeat, when was the last time you updated your plan design? If it hasn’t been in the last few years, then you may be betting a secure retirement for your employees on 1990s technology.