BenefitsEmployee Engagement

The Four-Legged Retirement Stool

Prudent management can be just as important as savings, retirement funds, and Social Security. Make sure employees get the highest return possible.

by Susan Rosenbleeth

Are you thinking the title is wrong? Isn’t it the three-legged stool of Social Security, employer-provided retirement plans, and employee savings that comprise the basis of retirement security?

Indeed, those three legs remain essential to employees’ retirement security. However, as many employers move to defined contribution (DC)-only retirement programs, this stool will become quite wobbly unless it is supported by a fourth leg: well-managed investments.

Last month in this column, I discussed shifts in the design and operation of DC plans that must occur before they can replace defined benefit plans as successful and reliable retirement vehicles. One of the changes I mentioned but did not discuss in detail is the need to adopt best-practice investment management features.

Studies show that although investment returns are the single biggest factor in determining ultimate account size, it is the lever most underutilized by plan participants. Often, employees’ investment behavior is not just passive; it is counterproductive. Most employees fail to diversify or rebalance their accounts regularly; and they tend to over-invest in employer stock or conservative options.

Professional management of these accounts could improve returns. Some DC-plan sponsors are taking the important step of offering professional advice to guide participants’ investment elections. Plan sponsors that have not taken this step cite potential liability and costs as key deterrents. Those that have taken this step typically provide investment advice via phone or web, requiring participants take action to initiate the service.

Some studies show that fewer than 15 percent of plan participants take advantage of investment advisory services when offered—again proving the power of inertia, procrastination, and confusion. To overcome these issues, some plan sponsors may consider the additional step of retaining investment authority for all or a part of the employer-provided funds, especially if some employees are not well prepared to manage investments themselves.

Studies also show that adding too many or too complex investment options tend to drive down participation. The confusion that results from having too many options fuels the natural inclination to do nothing. Resist the urge to add additional investment classes and/or the current hot investment option. Limit the number of investment options to 9 to 15. Work with a qualified, independent investment consultant to develop an investment strategy (and appropriate portfolio mix). Despite recent attention to this issue, many plan sponsors do not have a formal investment strategy for their DC plans.

Offer investment funds with pre-mixed asset allocations across a range of risk profiles that are rebalanced on a regular basis. These pre-mixed funds —often called life-cycle or life-style funds by the mutual fund houses—have a positive impact on participation. When clearly and frequently explained, participants understand that they can select one life-cycle fund that matches their risk preference, and leave it on autopilot.

Investment management and other plan administration costs eat away at returns. Consider the following:

An employee with a current account balance of $25,000 will accumulate $163,000 in 35 years with an investment return net of expenses that averages 5.5 percent annually (assuming that investment and administration expenses total 1.5 percent annually). If plan fees are reduced by 100 basis points or one percent, resulting in a net annual return of 6.5 percent, that same employee will have accumulated $227,000 in 35 years, increasing his or her retirement income by 28 percent.

Plan fees and expenses typically are grouped into three categories:

  • Direct and indirect investment management fees including fund expense ratios, 12b-1 fees, sub-transfer agent fees, broker/dealer concessions, front-end or
  • back-end sales charges, and other fees;
  • Plan administration expenses such as trustee, custody, recordkeeping, legal, auditing, annual reporting, and benefit processing;
  • Individual service fees for loans, hardships, QDROs, benefit calculations, special investment advice, and individual participant brokerage windows.


Maximize the value of the plan to participants by fully evaluating plan expenses. Begin by identifying all fees. Evaluate how they are dispersed among service providers. Then determine the reasonableness of the fees by benchmarking them against industry practices based on the size and complexity of the plan.

The power of a DC plan is built on consistent investment growth over a participant’s working career as well as monitoring of plan expenses and fees for reasonableness. Without this, retirement security in a DC-only world will be tenuous at best. Best-practice DC plans must be proactive in reinforcing this fourth leg of the new retirement stool.

Tags: Benefits, Engaged Workforce, HRO Today Global

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