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Going Beyond Professional Fiduciary Best Practices
by Christopher Carosa, October 8, 2024
Professional 401k Fiduciary “Best Practices” have come to mean common practices. But what if common practice can and should be improved? Procedural prudence is not necessarily substantive prudence. Shouldn’t we do better if we can?
Below we take a look at three common best practices and explore ways they can become better.
Investment Options
“A commonly adopted good practice is to choose a range of investment options so that it can protect the plan participants from risk,” says Cache Merrill, founder of Zibtek in Sandy, Utah. “It addresses the risk due to the fundamental principle of risk management, a key element of planning for old age which is investment. By giving people different options, the participants can be able to form their portfolios, within the ambit of their risk and financial appetite.”
One of the more popular ways to achieve this is to use a broad array of age-based target date funds. Unfortunately, these represent a one-size-fits-all philosophy that isn’t necessarily useful to all participants. How can this be improved?
“Though everyone appreciates the need for diversification, it is often not easy to offer specific attention to all the participants,” says Merrill. “With the use of technology, risk bearing fiduciaries could offer services based on individual risk and goals instead of one general and vague option.”
Customizing investments to the needs of each plan participant might increase interest in saving for retirement.
Still, even within target date funds there is some concern about sequential risk. This can be addressed most directly within the management of the target date fund.
“To reduce risk at the target date and then re-risk in retirement, go to a U-shaped glidepath,” says Ron Surz, president of Target Date Solutions in San Clemente, California. “Personalize target date accounts, because investing is personal. Employ the ‘best’ managers in each asset class.”
This concept is especially important for professional 401k fiduciaries because it better aligns practice with their fiduciary obligation.
Ron, president of Target Date Solutions in San Clemente, California, says, “By protecting people in the Risk Zone from Sequence of Return Risk, fiduciaries meet their Duty of Care that is like our responsibility to protect our children from foreseeable harms,” says Surz. “It’s substantive prudence that leads to better practice than procedural prudence that dictates hiring the most popular – the TDF oligopoly.”
Fees
“Fee transparency is an important best practice for 401k plan fiduciaries, and doing fee transparency right has implications on related practices like due diligence reporting and using the lowest cost share class,” says Jeff Coons, chief risk officer at High Probability Advisors in Pittsford, New York. “Fee due diligence is a plan sponsor responsibility, but the best practice is for the provider to ease that burden and support that effort in how they structure the investment menu and report to the plan sponsor. Fee disclosure is not enough, as is clear from 408(b)(2) fee disclosure regulations, so reporting should include fee benchmarking and analysis to help the plan sponsor understand what the fee disclosures mean. Maintaining the lowest cost available in the share class of funds offers some protection from fee-driven ERISA litigation as well. Instead of using higher-cost, revenue-sharing share classes that can make ‘whose paying what for which services’ harder to track, the best practice is that fees charged to the plan be direct and clear.”
Despite this, there’s still room for improvement in this particular best practice.
Coons says, “There would be a significant step forward in the fee transparency best practices if recordkeepers who affiliated with investment management were to quote their administrative fees without discounts for the use of proprietary investment products and show what total plan costs would be if either non-proprietary or ‘no revenue sharing’ fund classes were used.”
Again, this better aligns with the professional 401k fiduciary’s obligation.
“Every fiduciary must always remember that this is the participants’ money, so all plan fiduciaries should take steps to ensure each and every fee is clear, transparent, and competitive for the services being provided,” says Coons. “Greater transparency and better reporting should result in more participants receiving more of the markets returns in their retirement balances.”
Financial Education
“Another common best practice is providing plan participants with access to financial education resources and tools to help them make informed decisions about their retirement savings,” says Chris Dukich, owner of Display Now, in Boston, Massachusetts. “Financial education empowers participants to make better choices regarding contributions, investment allocations, and withdrawals, helping to ensure that they maximize their retirement outcomes.”
This has been the most challenging of best practices. It has evolved over the years from “you can’t do that” to “you need to do that.” What does it take to make it better? Has the technology environment changed in such a way as to address long-standing obstacles?
“This practice can be enhanced by personalizing the financial education experience,” says Dukich. “Instead of generic resources, fiduciaries could offer AI-powered tools that provide tailored financial advice based on each participant’s age, income, retirement goals, and risk tolerance.”
Part of the improvement involves offering relevant education on a real-time basis, not just in the once-a-quarter employee meetings.
“While periodic reviews are essential, advancements in data analytics and technology now allow for more frequent, real-time assessments of the plan’s investments and participants’ evolving needs. Instead of relying solely on preset benchmarks, fiduciaries can use more dynamic and personalized strategies using participant-specific data to tailor investment strategies to individual risk tolerance, retirement timelines, and personal financial situations,” says Richard Bavetz, investment advisor at Carington Financial in Westlake Village, California. “This level of personalization could lead to better long-term outcomes for participants by ensuring that the investments better match their unique needs. By being more proactive and leveraging technology and innovation, fiduciaries can move beyond basic compliance and aim for superior outcomes that genuinely serve the best interests of plan participants.”
As with customized investing, financial education geared to the specifics of each individual can inspire greater interest among participants.
“Personalized education increases engagement and encourages participants to take more informed actions,” says Dukich. “This can lead to higher participation rates, better asset allocation, and ultimately, greater retirement savings.”
“A comprehensive approach fosters increased engagement with the plan, leading to higher participation rates and better long-term outcomes for employees and employers,” says Bavetz. “Enhancing these elements makes the 401k plan more adaptable, competitive, and aligned with participants’ evolving needs keeping up with the evolving nature of the investment universe.”
Best practices are great. Now is the time to go beyond them.
Christopher Carosa is an award-winning online news producer and journalist. A dynamic speaker, he’s the author of 401(k) Fiduciary Solutions, Hey! What’s My Number? How to Improve the Odds You Will Retire in Comfort, From Cradle to Retirement: The Child IRA, and several other books on innovative retirement solutions.