Hospital leaders are constantly faced with the daunting task of remaining competitive and offering attractive benefit packages to employees. Among those packages is typically a 401(k) plan for employees to save for their retirements. While the share of employees offered 401(k) plans is rapidly growing, retirement plan participation is stagnating. This is a very troubling trend and may lead you to wonder why your employees are not taking full advantage of this benefit.
401(k) plans have proliferated since the first one was offered in 1980, creating an industry that includes excellence, mediocrity and plain malfeasance. Now that the 401(k) plan is over 30 years old, we are in a position to take stock, get back to the fundamentals and ask the questions: What would the ideal 401(k) plan provide?
Here are five key elements that effective 401(k) plans offer, with core characteristics and processes built around the needs of your hospital, management team and employees.
1. Widespread buy-in. The ideal plan provides technical counsel on effective plan design, best practices, implementation and ongoing administration. The average American spends more time planning a family vacation each year than they do planning for retirement. It is not enough to make it possible for employees to save: You must make the plan easy to administer and understand so participation increases in a way that also leverages your organization’s unique needs and preferences.
Advanced administration technology is essential to employee buy-in. Your plan must provide easy access to information and clear guidance for the employee. Each employee should have a secure website from which to access and view his or her account daily, update relevant account information and request transactions, such as reviewing asset allocation and changing investment elections when appropriate. Participants should be able to check personal performance, current share prices and historical returns of individual funds. This interface should also allow for easy communication with the advisor, including world-class educational materials.
2. Fiduciary protection. When you have a legal and moral responsibility to manage someone else's money, you are a fiduciary. An ideal plan advisor likewise embraces serving your plan as a co-fiduciary. It is important that your ideal advisor acknowledge this co-fiduciary status in writing and diligently eliminates any conflicts of interest that may otherwise bias their ability to provide optimal and prudent advice. Co-fiduciary protection reduces risk for trustees, investment committee members, your organization and other plan fiduciaries.
A study by the U.S. government arrived at several troubling conclusions with regard to 401(k) advisors' failure to live up to their fiduciary responsibility. Many advisors have consulting relationships with both employers and with the mutual funds they recommend. They are sometimes paid more to recommend one fund over more appropriate ones. No plan advisor should ever accrue any benefit from commissions, finder's fees, soft dollars or the splitting of money management fees. In fact, it is impossible to receive commissions while serving as a fiduciary. As a steward to your employees, it is critical that you confirm that your advisor is well positioned to avoid real and perceived conflicts of interest. This is critical to minimize liability under Employee Retirement Income Security Act, Pension Protection Act of 2006 and other Department of Labor regulations.
One way to avoid this conflict is to require a Center for Fiduciary Excellence certified advisor. Advisors must meet fiduciary standards of excellence and best practices such as helping you establish an Investment Policy Statement.
3. Financial security. When 401(k) providers fail to make costs clear, costs inevitably escalate. The only thing guaranteed in investment is that if you spend less, you keep more. Total internal investment expenses must be reasonable and adequately disclosed by the service providers. Internal expenses include management fees, administrative expenses, 12(b)-1 fees, transaction costs, bid-ask spreads and other trading related costs. Bottom line: In the ideal 401(k), mutual fund and other costs should be kept extremely low. Lack of transparency is such an important issue that Congress and the Department of Labor have committed to enacting transparency regulations to help solve the problem of cost disclosure for plan participants.
The plan's investment goal should be to provide a menu of investment choices that allow participants to earn the highest possible rate of return commensurate with their risk tolerance and personal constraints. Your investment committee needs to know that a sound procedure for identifying funds is in place. You want to ensure that your plan complies with PPA, ERISA and section 404(c) rules.
4. Employee peace of mind. There should be no mystery surrounding any fund or fund family offered to participants. Offering good, low-cost investment options from well-known investment companies helps increase participation. In the context of 401(k) plans, brands are very relevant. Participants are more confident and impressed when their plan includes well-known brand names they recognize. Brands increase confidence, provide familiarity, deliver consistency, assure certain quality standards and allow management to highlight their pursuit of excellence. And with an automatic rebalancing feature, they have the opportunity to reduce risk and enhance returns.
The ideal plan should offer turn-key model portfolios. Instead of becoming an investment expert, your employees can elect pre-designed and well-diversified model portfolios appropriate to their age, risk and return preferences, income needs and time until retirement. With no ongoing time commitment, they end up with an ideal investment allocation tuned to their family's unique needs and circumstances.
Another tool to assist employees is automatic enrollment. This feature is used to increase participation up-front, providing yet another opportunity for employees to save more for retirement. An ideal plan should also offer a proactive approach to automatically increase deferrals. In a nutshell, an employee should be able to allocate a portion of future increases towards their 401(k) automatically, so they can see their pay and savings increase at the same time.
5. Effective education. In the ideal 401(k) plan, an educational program for employees provides learning opportunities at every stage of the planning and contribution process. Group meetings, online education and one-on-one consultations to discuss plan features, investment options and the step-by-step process of investment selection all help provide a more successful retirement plan. The availability of advisors for face-to-face interaction is necessary. This individualized collaboration permits a participant to ask questions specific to his or her situation regarding funds, asset allocation, risk, return, savings levels and direction. Other communication tools should include quarterly investment review letters to all participants, shedding light on market events and investment results and offer a market outlook, an interactive participant blog and other industry-related articles. This direct access to personal investment information maintains participant enthusiasm and involvement.
Learn more about Savant Capital Management.
Related Articles on Healthcare Benefits:
Insurance Plans Offered on Health Exchanges Could Carry Significant Deductibles
Bureau Releases Data to Define Benefits Under Reform Law
IRS Begins Review of Hospital Community Benefit Activities
401(k) plans have proliferated since the first one was offered in 1980, creating an industry that includes excellence, mediocrity and plain malfeasance. Now that the 401(k) plan is over 30 years old, we are in a position to take stock, get back to the fundamentals and ask the questions: What would the ideal 401(k) plan provide?
Here are five key elements that effective 401(k) plans offer, with core characteristics and processes built around the needs of your hospital, management team and employees.
1. Widespread buy-in. The ideal plan provides technical counsel on effective plan design, best practices, implementation and ongoing administration. The average American spends more time planning a family vacation each year than they do planning for retirement. It is not enough to make it possible for employees to save: You must make the plan easy to administer and understand so participation increases in a way that also leverages your organization’s unique needs and preferences.
Advanced administration technology is essential to employee buy-in. Your plan must provide easy access to information and clear guidance for the employee. Each employee should have a secure website from which to access and view his or her account daily, update relevant account information and request transactions, such as reviewing asset allocation and changing investment elections when appropriate. Participants should be able to check personal performance, current share prices and historical returns of individual funds. This interface should also allow for easy communication with the advisor, including world-class educational materials.
2. Fiduciary protection. When you have a legal and moral responsibility to manage someone else's money, you are a fiduciary. An ideal plan advisor likewise embraces serving your plan as a co-fiduciary. It is important that your ideal advisor acknowledge this co-fiduciary status in writing and diligently eliminates any conflicts of interest that may otherwise bias their ability to provide optimal and prudent advice. Co-fiduciary protection reduces risk for trustees, investment committee members, your organization and other plan fiduciaries.
A study by the U.S. government arrived at several troubling conclusions with regard to 401(k) advisors' failure to live up to their fiduciary responsibility. Many advisors have consulting relationships with both employers and with the mutual funds they recommend. They are sometimes paid more to recommend one fund over more appropriate ones. No plan advisor should ever accrue any benefit from commissions, finder's fees, soft dollars or the splitting of money management fees. In fact, it is impossible to receive commissions while serving as a fiduciary. As a steward to your employees, it is critical that you confirm that your advisor is well positioned to avoid real and perceived conflicts of interest. This is critical to minimize liability under Employee Retirement Income Security Act, Pension Protection Act of 2006 and other Department of Labor regulations.
One way to avoid this conflict is to require a Center for Fiduciary Excellence certified advisor. Advisors must meet fiduciary standards of excellence and best practices such as helping you establish an Investment Policy Statement.
3. Financial security. When 401(k) providers fail to make costs clear, costs inevitably escalate. The only thing guaranteed in investment is that if you spend less, you keep more. Total internal investment expenses must be reasonable and adequately disclosed by the service providers. Internal expenses include management fees, administrative expenses, 12(b)-1 fees, transaction costs, bid-ask spreads and other trading related costs. Bottom line: In the ideal 401(k), mutual fund and other costs should be kept extremely low. Lack of transparency is such an important issue that Congress and the Department of Labor have committed to enacting transparency regulations to help solve the problem of cost disclosure for plan participants.
The plan's investment goal should be to provide a menu of investment choices that allow participants to earn the highest possible rate of return commensurate with their risk tolerance and personal constraints. Your investment committee needs to know that a sound procedure for identifying funds is in place. You want to ensure that your plan complies with PPA, ERISA and section 404(c) rules.
4. Employee peace of mind. There should be no mystery surrounding any fund or fund family offered to participants. Offering good, low-cost investment options from well-known investment companies helps increase participation. In the context of 401(k) plans, brands are very relevant. Participants are more confident and impressed when their plan includes well-known brand names they recognize. Brands increase confidence, provide familiarity, deliver consistency, assure certain quality standards and allow management to highlight their pursuit of excellence. And with an automatic rebalancing feature, they have the opportunity to reduce risk and enhance returns.
The ideal plan should offer turn-key model portfolios. Instead of becoming an investment expert, your employees can elect pre-designed and well-diversified model portfolios appropriate to their age, risk and return preferences, income needs and time until retirement. With no ongoing time commitment, they end up with an ideal investment allocation tuned to their family's unique needs and circumstances.
Another tool to assist employees is automatic enrollment. This feature is used to increase participation up-front, providing yet another opportunity for employees to save more for retirement. An ideal plan should also offer a proactive approach to automatically increase deferrals. In a nutshell, an employee should be able to allocate a portion of future increases towards their 401(k) automatically, so they can see their pay and savings increase at the same time.
5. Effective education. In the ideal 401(k) plan, an educational program for employees provides learning opportunities at every stage of the planning and contribution process. Group meetings, online education and one-on-one consultations to discuss plan features, investment options and the step-by-step process of investment selection all help provide a more successful retirement plan. The availability of advisors for face-to-face interaction is necessary. This individualized collaboration permits a participant to ask questions specific to his or her situation regarding funds, asset allocation, risk, return, savings levels and direction. Other communication tools should include quarterly investment review letters to all participants, shedding light on market events and investment results and offer a market outlook, an interactive participant blog and other industry-related articles. This direct access to personal investment information maintains participant enthusiasm and involvement.
Learn more about Savant Capital Management.
Related Articles on Healthcare Benefits:
Insurance Plans Offered on Health Exchanges Could Carry Significant Deductibles
Bureau Releases Data to Define Benefits Under Reform Law
IRS Begins Review of Hospital Community Benefit Activities