Neglect Your 401k Plan?
Behavioral science has the tendency to tell us things about ourselves that we instinctively (or otherwise) simply try to suppress or ignore. It comes as little surprise that one of the biggest impediments to human productivity is complacency. Complacency in a retirement plan can rapidly spiral into management crisis. At a Plan Sponsor University (TPSU)Program at Virginia Tech on February 8, half of the 22 plan sponsors reported that one of the biggest problems in their own plan was “inertia”.
Call it procrastination, inertia, laziness or absence of inspiration. It’s also commonly thought to be the deciding factor between “winners” and “losers”. When it comes to running a defined contribution plan, changes come slowly, if not at all for many companies.
“Unless the house was on fire, we would not make any changes”, joked a CFO for a mid-sized company about the company retirement plan. While said somewhat in jest, a show of hands showed that over half of professionals concede that their plans are plagued by complacency and “lack of interest” by executive management.
There is a long list of sad tales that begins with the words, “the plan was running well, we did not see the problems coming”. In a group of a few dozen plan sponsors, the gamut of problems arising out of management not caring enough about their plan is too many to address here. So let’s stay with the major issues.
The top problem reported by plan sponsors attributed to complacency is failing compliance and/or testing. Sponsors reported that they had missed employee enrollments and failed to make proper deferrals. In one case, the plan neglected to enroll several employees…for a period of over two years. After being flagged for a routine audit the problems were uncovered and showed that went beyond the missed enrollments.
it took six months of auditing by regulators to complete the evaluation and an additional two months of intense work to devise a response to correct the errors. The cost in fines, resources, time and compensation to the excluded employees was significant, not to mention the reputational damage.
To ensure that there was never to be a repeat, the company has instituted a routine that will maintain a vigilance on process and protocol. The company instituted the following :
- auto enrollment
- auto escalations
- annual re-enrollments
- mandatory quarterly education plans
- compulsory periodic log-in to record keeper web page
A company-sponsored retirement plan is no longer a nicety. It’s a serious business that can distinguish you from your competitors and help to win the recruitment battle…not to mention, it carries serious penalties if neglected.
