A better way for advisors to assist participants to reach their retirement income goals is to construct a fund line-up that provides for solid, consistent performance over time.
My firm, Acropolis, suggests a line-up of broad-based, low-cost, index funds which have a high correlation to the index they track. Year after year, index funds typically outperform a significant majority of their actively managed peers.
Promote the use of target-date funds. Market timing and performance chasing are perhaps the biggest mistakes that participants make.
To help participants avoid these behaviors, lifestyle funds and target-date funds serve better than individual asset class funds or industry specific funds.
Target date funds are generally better than lifestyle funds because most individuals have a difficult time assessing their risk tolerance. Over the course of my professional career, the same people that were bullish in 1999, were bearish in 2002. They were bullish again by 2006, but bearish in 2009. Now they have turned bullish again.
Lifestyle funds, based on an individual's "risk assessment," place them in a portfolio ranging from aggressive to conservative. Instead of adjusting their lLifestyle fund based on changes in their personal circumstances, far too many participants change lifestyle funds in reaction to the media-most often selling low and buying high.
Target-date funds, on the other hand, have protected participants from this cycle of buying high and selling low. Since the participant realizes that the fund will move from aggressive to conservative without their intervention, they seem more comfortable staying put in times of unpredictability. In addition, Target-date funds, in order to maintain proper asset allocation, rebalance frequently causing buys at the bottom and sells at the top. This is the behavior that we want to encourage.
Perform an annual fiduciary plan review. While there are many benefits to an annual plan review, a few of the key questions which must be answered are:
Is the plan still meeting the goals of the owners of the company?
Is the plan in compliance with ever changing regulations?
Is the plan incorporating new features?
Most outside plans my firm has reviewed have not yet added a Roth 401(k) feature. While this feature is not right for each individual, it is probably right for a subset of employees and costs nothing to add.
Another feature we find not often strategically used is the New Comparability Profit Sharing formula which allows for different allocation amounts to different groups of employees. This formula can provide a means to allow for a greater percent of the profit sharing contribution to go to employees that the company desires to reward, for example, highly compensated employees.