CFO Magazine recently issued a special report titled “401(k) Trends and Tips for 2016”. The complete report is available online at 401(k) Trends and Tips for 2016.
But knowing that you are a busy professional, I thought you might appreciate the following “CliffsNotes” version:
1. There is a demonstrable shift away from conventional (aka “active”) investment strategies to evidence-based (aka “passive”) strategies…but perhaps for the wrong reason.
Lawsuits alleging breaches of fiduciary liability over high fees and/or poor performance have led many plan sponsors to realize that active strategies continue to largely under-perform their benchmarks, while also charging higher fees than passive strategies that tend to replicate their benchmarks.
But plan sponsors making the switch to evidence-based investments should be careful to document that the rationale is based on those options being more prudent and lower cost, rather than on making the move to protect their own interests.
2. The DOL’s new Fiduciary Rule will require more advisors to put participants’ interests first...and plan sponsors should verify the status of their “advisors”.
Set to take effect in April 2017, the new Fiduciary Rule will require that anyone providing advice to a 401(k) plan participant or an IRA holder place that investor’s interests ahead of their own.
Unfortunately, many plan sponsors may have been unaware that their current advisor wasn’t already required to do just that. Plans sold and serviced by brokerage firms, insurance companies, payroll companies and mutual fund companies have likely had conflicts of interest that allowed them to put their own interests ahead of those to whom they provided “advice”.
So, while advisors will be legally required to serve as fiduciaries, it will still be incumbent on the plan sponsors to “trust, but verify”.
3. The Pension Protection Act (PPA) of 2006 has helped in many ways…but may have also hurt in some.
Celebrating its 10th anniversary, the PPA gave us Automatic Enrollment and Automatic Escalation, but also spawned a reliance on Target Date Funds (TDFs).
Yes, TDFs have largely freed participants from the burden of building and managing their own portfolio (a task most were never equipped to do in the first place), but TDFs have also made it possible for fund companies to hide poorly performing funds and/or hide fees.
As with the new Fiduciary Rule, the report reminds plan sponsors that they still have to demand transparency around the investments offered to participants and the costs involved.
4. Adding value to a 401(k) plan with Roth features…a tax-diversification strategy.
The ability for participants to contribute Roth, after-tax dollars isn’t necessarily new, but it is certainly gaining momentum.
In-Plan Roth Conversions are also now available, but haven’t really taken off in popularity.
5. How 401(k) plans can emulate 403(b) plans…with a focus on income-replacement.
The focus of the 401(k) plan has historically been on building a nest-egg, not on how that nest-egg converts to income in retirement. Fortunately, more focus is being placed on income-replacement, which has been a focus of 403(b) plans for years.
The key takeaway from the CFO report is that the 401(k) marketplace continues to evolve and employers and fiduciaries should be sure that their retirement plans keep pace.
As always, please contact Capital Directions if we can help you with any aspect of your retirement plan.