Like an old house that was cutting-edge when it was built but hopelessly archaic today, your 401(k) may have fallen behind the times. Is this true of yours? And, if so, what can you do about it?
Today, we get some thoughts from Laraine McKinnon, the defined contribution director at investment management company BlackRock.*
Legacy Plans May Have Fallen Out of Date
“A defined contribution plan might look the way it does today because it’s a legacy situation,” McKinnon says. “Originally it may have had certain funds in it that were later removed. The match was constructed a certain way, or its eligibility provisions were set up as was common in earlier years.”
In other words, the plan was designed appropriately for its time. But, in reality, you may be left with a plan that has undergone significant remodeling over the years, and it may not be in keeping with current thought about best practices. “Changes in thinking over time have brought plans the structure they have today,” McKinnon says. “But if you were to design one from scratch, you would likely build it very differently.”
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Peering into the Future
In order to help plan sponsors reinvigorate their plans—always with a goal of helping participants reach retirement readiness—BlackRock is developing some innovative tools to be available through plan advisors or directly to very large plans. Dubbed “Future in Focus,” the tools will allow plan sponsors a way to peer into the future, so they can have a better understanding of how their plan is actually doing.
“Our goal is to develop ways to help forecast the future for plan participants. From our perspective, we believe that knowing what current savings rates and current investment selections will mean for participant retirement balances when employees are ready to retire is critical to their ultimate success,” McKinnon says.
What’s Your Definition of Success?
“With that knowledge, the sponsor can decide whether or not the plan meets their definition of success based on those forecasts. This strategy should give people a whole new perspective on their plan and if it is meeting the needs of participants.” BlackRock’s goal is not to try to define success but to give plan sponsors the information they need to make their own determination of what plan success is, McKinnon says.
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Maybe you also have a defined benefit plan that replaces 60 percent of final average pay, so you feel that the 401(k) plan only needs to replace 20 percent. That’s a very different scenario than an employee population who will rely on the 401(k) plan alone, because the company does not have another qualified plan and does not believe that Social Security will remain a viable option for retirees.
Some companies believe the replacement ratio should be close to 100 percent, and others think 75 percent. The definition of plan success is up to the sponsor; forecasting data would simply provide information so you can judge how closely you’re meeting the definition.
Likewise, BlackRock does not seek to provide retirement readiness statements for individual participants. Rather, the tools they have under development would help plan sponsors see the big picture by considering actual participant and employee data for the entire group.
Tomorrow, we’ll get McKinnon’s insights on the importance of forecasting outcomes by groups, plus we introduce the free webcast from ARAG, Legal Benefits—Best Practices for Every Employer.
*BlackRock is not recommending any security or providing advice through McKinnon’s participation here and also wishes to make clear that investing involves risk.