(This story was first published February, 2015)
The ideal DC/401(k) plan seems obvious yet few plans are implementing it a conclusion from over 130 TPSU programs held in 2015 and 2016. I think we have the answer but the fix is not easy.
First, let’s review the Ideal Plan:
- Auto enrollment and re-enrollment
- Deferral starting at 6%
- Auto escalate 1%/year up to 12%
- Stretch the match
- Use professionally managed investments like target date funds
The results for a 30 year old earning $45,000/year under the Ideal Plan compared to a normal plan are stunning – almost $1.5 million v. $500,000 at retirement or retirement income of $60,000/year v. $20,000. There are no or minimal additional costs and arguably less work and liability.
When we present the Ideal Plan to employers at TPSU programs they are stunned partly because of the efficacy of it and partly because it seems so obvious. So why are virtually no plan sponsors using all facets of the Ideal Plan?
HR and benefits professional have 10 jobs with their retirement plan not at the top of the list in terms of priorities or knowledge level. Their CFOs still do not understand the ticking time bomb of older employees not able to retire and the inherent costs, so getting them to focus on the DC plan is difficult at best.
But the real problem lies with the plan’s financial advisor. Less than 10% of plans use an Elite advisor with more than $250 million in DC assets and less than 25% use a Core advisor or better with more than $25 million in DC assets. Emerging advisors who manage more than 60% of DC plans today, made up of blind squirrels and so called accommodating advisors, are unlikely to push their clients into an Ideal Plan either because they don’t know about it or they don’t feel confident enough to promote it.
So what about Core and Elite advisors? Most are still primarily sales people and the 1st rule of sales is: when you make a sale, shut up. Why push for more when there’s no immediate financial benefit? More later on why experienced plan advisors should be pushing their clients to adopt the ideal plan besides the fact that, for the vast majority, it’s the right thing to do.
