Retirement Planning

Does Your 401(k) Plan Have All the Elements of a Successful Retirement Plan?

Planning and saving for retirement is a major financial issue for most Americans. We spend decades worrying about whether or not we will have enough money saved for the goal of being financially independent. One of the best tools to improve our odds of successful retirement is our company retirement plan. Since most companies today offer only defined contribution plans (primarily 401(k) and Simple Plans), we will focus on the key aspects of successful defined contribution plans. This is written for the plan sponsor/trustee, usually the owner or top executive in smaller businesses or the human resources director in larger organizations.


The key elements of a successful Retirement Plan are as follows:

Compliance: A successful retirement plan is in compliance with all necessary testing and government filings, distributes all legally required information to participants first and is administered exactly as the plan document is written. The fiduciaries of the plan, the trustees, members of the plan committee and members of the board of directors, meet the fiduciary requirements mandated under ERISA, the federal law that regulates retirement plans. Fiduciaries must exercise the “care, skill, prudence, and diligence” of an experienced fiduciary in fulfilling his/her duties. Fiduciaries are responsible for what they “should know” about investments-as opposed to what they actually know. More than one court has said, “A pure heart and empty head are not enough”. All plans should have an Investment Policy Statement which will assist the fiduciaries in meeting these stringent requirements.

Participation: This is the litmus test for a successful 401(k) plan. Average participation rates vary by industry and wage levels. The overall participation rate across all industries is about 75%. A successful plan will have higher than average participation rates.

Savings Percentage: The more money people put aside in their 401(k), the greater their chance for a secure retirement. Also, the higher the rate, the easier it is to pass discrimination testing. The overall average employee deferral percentage is between 6% and 8%.

Asset Allocation/Investment Selection: A 401(k) is fundamentally a long term savings and retirement plan. The difference between 6%, 8% and 10% rate of return over 20-, 30- and 40- years can be enormous. Asset allocation, or the relative percentage a participant puts into cash, bonds, and stock, is the fundamental investment decision and can have a huge impact on the funds available for retirement. Each plan must have the appropriate investment classes available to meet the Prudent Investor standards.

Investment Performance: In addition to having the appropriate investment options, the absolute and relative performance of the investments must be monitored at least annually against the appropriate benchmarks. In addition, high cost plans drain away returns from participants’ accounts.

Costs and Administrative Efficiency: It is the plan sponsor’s fiduciary duty to insure that the fees of the plan are “reasonable”. Many plans have fees buried inside the underlining mutual fund investments that increase overall fund costs. In order to know whether or not a plan's costs are reasonable, the plan sponsor must know what the actual costs are. This requires some due diligence on the part of the sponsor. An annual review of plan expenses will assist in determining reasonability.

Ask yourself the following questions:

1. Was your retirement plan provided to you by an objective party other than an insurance company, investment brokerage house or other commission oriented firm?

2. Are you happy with the performance of the funds in your plan? Are you or your investment advisor able to select from the best funds available in the market today? Are you or your advisor reviewing the performance of your funds and comparing them to their corresponding bench marks on an annual basis?

3. Have you reviewed the total costs of your retirement plan, both disclosed and undisclosed?

4. Does your retirement plan provider acknowledge the fiduciary responsibility under ERISA sections 3(38) and 405(d)(1)?

5. Is your overall participation rate in excess of 75%?

6. Is your overall savings rate in excess of 6%?

7. Does your plan have an Investment Policy Statement? Is this reviewed annually?

If you answered no to any of the above questions, consider having 1st Portfolio provide you or your company with a qualified plan review. We help plan sponsors make their plans more successful by increasing participation and savings rates and helping participants allocate their assets in an age and risk-appropriate manner. We also assist plan sponsors in meeting their fiduciary obligations by assisting them with the investment selection and monitoring process as well as in controlling and lowering the total cost of the plan. We provide our business services in a transparent manner openly discussing our fees and avoiding any real or perceived conflicts of interest. We act as fiduciaries to the plan, always keeping the interests of the participants and their beneficiaries as our top priority.