Episode 523 – Measuring the Success of Your 401(k) Plan

Welcome to the Your Life Your Wealth podcast with John Walker and Jason O’Meara, helping you find clarity and comfort for your life and wealth.

John Walker
Hey, welcome to the Your Life Your Wealth podcast. I’m John Walker, Regional Vice President at Mercer Advisors, joined as usual by my good friend and colleague, market leader, and Certified Financial Planner, Mr. Jason O’Meara. Jay, thanks for joining me again.

Jason O’Meara:
Of course. Hey, John, how’s it going?

John Walker:
It’s good, man. It’s good. And I’m excited about our topic today and the guests that we have joining us because we’re going to talk about something that we don’t always talk about, but it is something that a lot of employers and probably every employee is thinking about, but not something they always understand. And that’s what actually drives results in a 401(k) plan, right?

And so, if you are someone who is responsible for a 401(k) plan, if you sponsor one at work, if you provide one to your employees, you really need to be cognizant of this, right? What is success when you are responsible for this type of plan? And how do we measure that, right?

And so, we’re going to talk about some of the simple metrics that can be used to identify if a plan is successful, and then we’re going to talk about how we can make sure if your plan is not on track, we can give you some ideas around true, clear, data-backed levers that you can pull that can actually move the needle.

So, we’re going to talk about how plan design can be done more effectively using actual structure and how we can help drive better participation, higher savings rates, and ultimately, better retirement readiness for employees. And to help us have that conversation is one of our great colleagues here on the retirement plan side, Mr. Dennis Jablonski. Dennis, thanks for joining Jason and I today.

Dennis Jablonski:
Guys, thanks for having me back. It’s always a pleasure. I appreciate the opportunity.

John Walker:
And Dennis, I think this is a certainly an underserved part of the market, right? That we as wealth advisors and financial planners partner with, right? Because many, many plan sponsors do the hard work of getting a plan set up and trying to provide these benefits to their employees, but they don’t always understand how to actually define success within that plan.

Dennis Jablonski:
Correct. Yes, it’s true.

John Walker:
And really from what I’ve learned from you, Dennis, it really comes down to three simple metrics. Participation — so how many folks are actually involved in the plan. How employees are saving — so how much they are contributing to those plans. And then whether they’re actually on track for retirement, right? Those employees, are they ready? What is their level of retirement readiness? And we consistently see plans that really struggle not necessarily because of investment performance, but because of all these other factors that the employer is not accounting for.

Dennis Jablonski:
It’s a great point. So, the first thing — let’s start here. An employer puts a retirement plan in place for the employees, for the participant, right? It’s there. They want the participant to take advantage. It gives you the opportunity to put money away for retirement, right?

And let’s talk a little bit about the statistics of what’s going on around. According to Investopedia, we’re looking at 40% of Americans have $0 saved for retirement. And let these numbers sink in for a minute. 40% of us have $0. And then 20 to 46% of us have zero savings outside of any type of plan they have. So, think about those numbers.

We have people that have $0, and we’re in an environment right now that unfortunately people are losing jobs because of the technology that surrounds us. Everybody likes to think they have security in their position at work with their job, but unfortunately a lot of them are being shown the door and being laid off or fired for reasons that are really out of their control. So, we’ve identified the problem with the savings dilemma that we have in America.

But what we want to do is realize that a retirement plan is a key component to it. No matter what point of life you’re in, you have the ability to start to save money in an account. It’s going to be there hopefully for when you retire, whether that be on your own voluntary status of retirement or if you’re actually shown the door.

John Walker:
Those are alarming statistics, Dennis — the amount of folks who really are not even participating in any type of retirement plan or savings vehicle. But for those who do have that opportunity, right, it is critically important that the employer helps guide them to decisions that will improve their readiness for retirement. How do they measure that, Dennis? What are they looking for when it comes to a successful participation rate?

Dennis Jablonski:
So what we’re looking for is the target is that you want upwards of 80 to 90% of your employees to be participating. I’m just going to throw another couple stats at you. According to Investopedia again, 44% of workers who have access to a retirement plan do not participate, right, because the fear there is: I’m living month to month, I don’t have enough money, I have to worry about next month’s tuition, mortgage, all those expenses that we deal with. But almost 50% of workers who have the ability to participate in a 401(k) plan don’t.

So, what do we do to change that a little bit, right? What we’re trying to do is we’re trying to get them ready to be able to — at least once you hit that anniversary date, whatever the date is — to first understand, if you are employed, what the plan looks like. What the dates are, whether it’s three months, six months, a year later, however many hours. Once you’re able to enroll in the plan, you should then go out and join the plan.

But the problem is a lot of employees don’t want to take the initiative to do that. So the one metric that’s kind of swinging the needle the other way is the fact that we have auto enrollment, meaning that once that employee hits that date — whatever that is — they’re automatically enrolled in the plan, usually at around 1%. So they have to literally go in and opt out.

When you’re auto enrolled in the plan at least you’re automatically enrolled and you know that you’re participating at least 1%. So, we’re finding that those companies that offer auto enrollment tend to do better from a participation rate than those that have to go out and find a way to go in and join the plan.

We also know that those that have what’s called an auto escalation — meaning that if you do get a raise and you make some more money, you’re automatically escalated with the amount of your deferral rate — that usually goes on an annual basis. But again, the employee, by human nature, is going to have it, right? If I’m not auto escalated, if I have money in my pocket, if I have more money in my paycheck, human nature is going to say I’m going to go out and spend that money because we worked very hard, and we all know that we deserve those things in life that we need and want.

But if the money’s coming directly out of my paycheck — A, I’m being taxed at a lower rate, it’s coming out of my gross pay, and B, it’s going automatically into this vehicle that I can now save, but it’s forcing me to be able to increase my contribution level automatically by making more money in my paycheck. So those are two of the levers that are really driving participation in those more successful plans.

Jason O’Meara:
It’s really interesting, Dennis, because it’s looking at it from a psychological standpoint. It is a lot harder for people to actively do something, right? So, if I have to actively decide to sign up for something, or I’ve got to actively decide to increase something, most people — like you said — aren’t going to do it. But having that auto basically means I only have to be disciplined once, right? I don’t have to be disciplined every month, every year. One time I have to be disciplined, which is to either not opt out or — if I do have to opt in to a plan — I set my plan up once, set the auto escalation.

And now I’m set, right? I don’t have to be disciplined again, and it’s probably one of the best things you can do for yourself, you know, if you’re listening to this — make sure that you are set up and make sure that you’re in the plan. But as Dennis mentioned, you learn to spend what’s in your pocket.

So, if you’re not saving — if you don’t have enough money in your 401(k) and it’s going straight into your pocket — most people aren’t going to put it aside. This leads to what John and I have talked about before: paying yourself first. Right? We all work, we spend, we’re trading our time for money, and being able to put this money aside without us having to actually physically do it is us paying ourselves first — before the creditors, before your mortgage, before your food, before your fun. You took care of that savings goal, and now you can go ahead — whatever money is in your pocket, you can spend.

Dennis Jablonski:
And we’re finding actually through this — through these features — that it’s very impactful for lower income and younger employees. We all look back now in our lives, no matter what age you are, and hindsight’s always 20/20 — but I wish I would have known what I know now when I was younger, right? So, if you have auto escalation and you have auto enrollment when you just get first hired in your 20s or even your 30s, you’re forced into it, but you’re going to thank yourself down the road because those older demographics in the workforce wish they would have done something when they were younger and prioritized that.

So we’re finding out that it is impactful for lower-income earners and younger employees. And also, employees who are once auto enrolled rarely — rarely — opt out once enrolled, right? So now, to your point, Jason, you have to go in and physically opt out of this because I’ve been auto enrolled. That’s also saying to me: well, now I have to go through the hassle of going in and taking myself out of the plan, and we find that those better plans from an enrollment standpoint really stay in the plan and rarely opt out. So, I think that’s also very important.

John Walker:
Jason, we’ve talked about this in the past, too, I think around psychology and behavior. And Dennis, one of the things that I think often helps employees contribute more — which is another metric that we want to talk about, not only just participation percentages but also contribution levels — is one of the other metrics of defining success. How much does plan design — the actual structure and match and all the other things — how much does that actually influence how much employees save?

Dennis Jablonski:
Secondly, that’s the next lever, right? So, you really do have a responsibility to yourself to really understand the plan, right? Part of your benefit package at whatever company you’re working for — and it is a very competitive marketplace out there and it’s getting more competitive day by day — you really should know the ins and outs of that plan, right? You should know what the plan is. Is there a Roth component? Is there an employer match? And if you’re not contributing and there’s an employer match sitting there waiting for you, then you’re — as they say — leaving money on the table. I like to say you’re lessening your wealth, your responsibility to yourself and to the company, right?

So, think about that, John. Most plans have what’s called a safe harbor match, meaning dollar for dollar match at 3%. So, I have to put 3% in to get that full 3% from the company. But if I’m only putting in 1% or 2%, I’m getting matched, but I’m only getting matched that 2%. So, think about putting more money in and trying to get that full match. And even some safe harbor will go up to 4%, right? So, it’s dollar for dollar, 3% up to 3%, and then 50% on the next two. So, to get the full match from the company, I have to put in 5 to 6%, but then the company’s willing to put in 4%, and that’s substantial money — that’s every paycheck.

So, understand that a 100% match up to 3% stops the employee at 3%. But then with the — if you go up to 6% — the employees are much more willing to capture the full match from the company, right? So the match design definitely drives behavior and not just participation. And that’s what we’re trying to do. We want to drive participation, but how are we going to drive the behavior inside of that?

Not to mention, a lot of plans also offer a profit-sharing component, meaning that if the company does well, you’re going to be the benefactor of the company doing well. The company is going to reward you with additional compensation if you’re employed and if you are contributing to the plan. And that company may have some good years, and there’s some more substantial dollars sitting on the sideline because you didn’t understand how the plan worked or what the compensation levels were. So those are, I think, very important metrics.

Jason O’Meara:
Yeah, because I mean at the end of the day, I always find that you get what you pay for, right? So, if your plan is matching your contributions, more people are apt to make those contributions, as you said. But if it’s a dollar for dollar for 3% — say you put 3% in, the company puts 3% in — that’s a guaranteed 100% return. We don’t have many other things that can offer a guaranteed 100% return, right?

So, if you’re not taking full advantage of at least the match — like Dennis said — you aren’t just leaving money on the table, and it’s going to limit your ability to grow your wealth. So, I mean, those people are trying to work to eventually one day not have to work. The only way for that to happen is to be taking advantage of these opportunities that you have.

Dennis Jablonski:
And Jason, getting back to your human nature comment earlier — listen, I get it, right? We have families, we have responsibilities, we have expenses, and as a head of a household, what you’d normally do is you’re the breadwinner, right? And you’re taking care of everything. You’re trying to do all the right things. You’re paying the mortgage, you’re paying the bills, you’re paying the tuition, you’re paying all the expenses. But what’s lost in all that is: what are you doing for yourself?

Right? And when you have a younger family and you’re dealing with all the expenses of doing that, you’re not thinking about it, and it’s not being somebody that’s selfish in thinking of themselves. They’ve just prioritized other things in their life instead of themselves. But at some point you have to stop and say, you know what — what am I doing? Because tomorrow is just a day away and you don’t have the chance to go back and do it all over again. But at some point you have to realize that you need to do something for yourself. You have this vehicle. You have this opportunity. You have this plan that you can automatically be enrolled in to be able to save money, and still you’re just neglectfully not understanding it or doing anything. Just take the time to understand what the plan’s all about and get in there and get participating. You will thank yourself down the road.

Jason O’Meara:
Yeah, and Dennis, one of the biggest things — in my opinion, that I’ve seen — one of the biggest things that stops people from taking action is lack of understanding, right? People procrastinate when they don’t understand. So, what are some things that may be defaults that they’re putting in the plans to kind of eliminate that feeling from their participants?

Dennis Jablonski:
Sure. So, a couple of things, right? So, the participation’s right, the plan design is very, very important. But understand the opportunity to — a couple things. Number one, you have investments inside of the plan. And let’s talk about what the most participated option inside of a plan is, it’s what’s called the target date fund, right? So, 61% of all — according to Investopedia again — 61% of all 401(k) participants are invested in what’s called a target date fund.

And that’s what’s called a fund of funds, where there’s an allocation inside of that fund based upon how old you are and how many years you have until retirement, that there’s an automatic allocation in there that’s going to give you the amount of equity versus fixed income that should be sufficient to the age that you’re at.

We all know that investing is all about a timeline, right? We’re in our 20s and 30s, we have a much longer road till retirement. So, we can deal with the ups and downs and we can deal with the volatility of a market. So, we have a longer timeline. And as we get older, that timeline shrinks and so we have to become a bit more conservative.

So, what a target date fund does — it’s allocated that way, where you’re able to go in and the target date allocation will reinvest as you get older. So, there’s really nothing that you have to do from a manual perspective, but the ability to have this target date fund in there, it’s a balanced fund, which is great, that’s a great solution.

And by the way, 61% of all those participants that we talked about use a single target date fund. But you have to realize that a target date fund is to be used individually, right? So if you own two or three target date funds, there’s just a lot of replication. So, you think you’re getting a broader diversified portfolio where you’re really not. A target date fund is just to be used individually. So, understand that.

Those target date funds are supposed to be a great vehicle, but they’re there for reasons to give you better diversification. And participants — getting back to human nature — they rarely make allocation changes, right? If it isn’t broke, I’m not going to fix it. And we’ve been blessed, right, for these last three and a half, almost four years of having phenomenal performance in anything that we’ve invested in.

But just think back — 2022 wasn’t that long ago, when the best performing asset class was cash, followed by municipal bonds being down 8%. Remember that when you’re making your allocation, because having the ability to go in with a solution like a target date fund is phenomenal. So, understand what the investments are that are being offered to you.

And then the other part of that is also you should be getting educated. What I do as a retirement plan financial advisor — when I go out to meet with the company, I’ll sit there and give a broad presentation, an educational presentation to all the employees. And then I’ll stick around and do any one-on-one guidance or education if need be. You have that ability as an employee. Think about that, right? You have the ability to interact with a financial advisor, to be able to ask all sorts of questions about financial planning and anything else that has to do with the plan, but you have that ability at a very low threshold to be able to utilize the expertise of a financial advisor to be able to help you with that.

But you need to engage, right? You can’t sit there on the phone or sit there in an education meeting and scroll around or think that I’m just checking the box to get this done. You need to get involved in your plan by understanding that you have a responsibility to understand more about the confines and the way the plan’s constructed. But also, when you have the opportunity to be educated by somebody that’s taken the time to come in to do that — that’s time that you should really be ready. Have your investments ready, have your questions ready, have your deferral percentages ready, and use that time — whether it’s in a group setting or in a one-on-one setting — to be able to engage that person to really make that time meaningful. That’s another metric that really gets overlooked, but it is very, very important with trying to produce better outcomes for employees.

John Walker:
That’s such a great point. And I think looking towards things where Jason shared — I think behaviorally, people have a hard time almost making decisions, right? Analysis paralysis. If they’re not clear on what they’re doing, whether it’s the underlying investment choices, whether it is understanding how target date funds work, whether it is what are the investment choices I should be making based on my age and objectives and outcomes — it’s really difficult to do on your own.

And I think it often leads plan participants to either simply opt out or go to some sort of default. I mean, we’ve all heard horror stories of, “Hey, I’ve been employed at this company for 15 years and all my money has been in a money market fund.” Tragic horror stories where — and ultimately, it’s critically important that the plan sponsor, the employer, has a responsibility to their employees to provide these things to them, right?

And so, for those that are listening — whether you’re the employer or employee in this situation — these are really important takeaways and lessons. Taking advantage of the plan itself. And if these are not the things that your plan is providing to your employees, Dennis, it’s really important that it does, right? And I think if people are listening and understanding — like, what would we do if there were gaps? What should happen next to ensure that a plan is actually being run successfully?

Dennis Jablonski:
Well, first of all, you have to take some ownership, right? You have to get involved. You have to understand that this is a true benefit in the benefit package, right? So, from an employee standpoint, I need to take some ownership of that, and I need to find out exactly how the plan works, when I’m eligible to be able to enroll, what the parameters are, what the limits are, what the match is, what’s going on. So, you need to take the ownership of doing that now. You’re going to get an email or something in the mail that says: hey, by the way, you have the ability to enroll in the plan here. And then go and do it.

And to the point we made earlier, unfortunately we procrastinate and we’re not going to do anything, right? But if you go and you’re proactive and you want to get involved, and you do understand that this is an opportunity, then you’re going to get more involved.

From an employer’s standpoint, you do have a fiduciary obligation — as Jason does, as I do as a financial advisor — to do what’s in the best intent of that employee as we do for our clients. So, you do need to make sure that you do have policies in place like educational policies and participation rates, and you’re taking a look at the plan with the metrics that you have. You should be working with either the record keeper or the financial advisor, and they should be providing you with guidance and with analysis to be able to help you maybe change some of the levers in the plan.

So, if it’s just kind of running on idle and it’s moving along — if it isn’t broke, don’t fix it — that’s all well and good. But if you do get a knock on the door one day from somebody that says we’re here to audit the plan, and are you doing all these things that you said that you intended to do by putting the plan in place? — you do have a responsibility to yourself as well as to the employees to make sure that that plan is running efficiently and it is in the benefit of the employees.

And I’ve got to tell you, John, more times than not, especially in this environment, sometimes a good robust 401(k) plan is the differentiator from hiring that key employee from Company A versus Company B. And being able to recognize the plan as a true benefit — just like your medical benefits and your paid time off and other benefits that are offered — a retirement plan is a true benefit. And if you’re not taking advantage of it, shame on you.

And if you’re not doing more due diligence on your behalf for you and your family — again, hold somebody else accountable, but look in the mirror and understand that you should be more accountable for the decisions that you make. Let me just tell you, John — we have the saying on my side of the business: plans do not fail because of investment performance. They fail because employees don’t save enough and employers don’t care enough.

John Walker:
Excellent way to take us home here. It’s so critically important that we address this topic and that we really make sure that plan participants are on track and the plan sponsors do what they can to hit some really simple metrics to make a plan successful. Dennis Jablonski, Wealth Advisor on the retirement side here at Mercer Advisors, thanks for joining Jason and I today.

Dennis Jablonski:
Appreciate the time, gentlemen. Thank you very much.

Jason O’Meara:
Of course, thank you, Dennis.

John Walker:
So, if you have questions, we’re always here to help. You can email John Walker at jwalker@merceradvisors.com or Jason O’Meara at jomeara@merceradvisors.com. We always love to hear from you. I’m John Walker, Regional Vice President of Mercer Advisors. On behalf of Jason O’Meara, thanks so much for listening to the Your Life Your Wealth podcast. We’ll see you next time.

Announcer:
If you’re interested in learning more about applying the principles we discussed to your personal financial circumstances, please visit merceradvisors.com.

This presentation by Mercer Global Advisors Incorporated, also known as Mercer Advisors, was intended for general information purposes only. No portion of the presentation serves as the receipt of or as a substitute for personalized investment advice from Mercer Advisors. All expressions of opinion reflect the judgment of the speaker as of the date of recording and are subject to change.