Why Employers are Rethinking Turnkey 401(k) Plans

Turnkey retirement-plan programs sounded like a great idea.

When fund companies and other big firms started offering them in the 1990s, employers were promised solid employee benefits delivered with groundbreaking simplicity and low cost.

What was not to like? Plenty, it turns out.

Turnkey plan providers like to boast about the number of funds they make available to employees. The typical plan now has hundreds of options. Yet this abundance hasn’t benefitted the typical employee: To the contrary, it’s led to employees feeling overwhelmed.

Too many choices have led to paralysis, with employees simply leaving their contributions in cash. That’s certainly not going to help them earn the returns they need to retire one day.

Second problem: Turnkey providers are failing to educate plan participants. Employees need a clear understanding of setting goals and investing properly to achieve them. And since they’re bombarded with daily headlines about the markets and investing, they need to be continually reminded about the difference between impulsive trading and sound long-term investing practice. That’s rarely, if ever, taking place. We’ve even heard of employees making daily changes to their 401(k)’s, a practice that usually backfires badly.

Finally, turnkey plan providers were supposed to help plan sponsors stay on top of their administrative responsibilities. All the feedback we hear from small and mid-size employers is that it’s not happening, and that important tasks are regularly falling through the cracks.

All of that helps to explain why some employers are seeking out alternatives to the giant turnkey plan providers. They’re taking a closer look at companies like Taylor Frigon, where our team offers something very different from the industry norm.

Our investment lineup for 401(k)s consists of just four funds: a growth strategy, an income strategy, a default strategy featuring a conservative balance of investments, and a money-market fund. The size of our menu is a direct reflection of our conviction that managing risk and capturing growth is best achieved by holding a moderate number of carefully chosen investments. (Read more about diversification here.)

This compact fund menu not only simplifies investment decision-making for plan participants, but it virtually eliminates the temptation to jump from fund to fund.

Then there’s education. To give participants a real shot at successful retirement investing, personal and ongoing education is essential. We personally visit clients at least twice a year, explaining how important it is to avoid “playing the market,” and to invest in good companies for years, not quarters.

We’re proud that our education helps to counterbalance the hysteria that plan participants are subjected to from the financial shout shows, from print advertisements and even from their friends and neighbors. Investing is simple—it’s investors who tend to make it difficult.

On the administration front, we partner with third-party administrators to provide a high-touch, personalized level of service. Employers who hire turnkey providers too often find their “partner” is a bureaucratic machine that isn’t concerned with their peace of mind. While turnkey programs may charge less for administration, that advantage can be easily negated through penalties for compliance shortfalls.

No employer wants their plan participants to be confused and overwhelmed. And they certainly don’t need avoidable compliance headaches. This explains why more are considering leaving faceless turnkey plans and looking to get back to basics: A clear investment path, real education and solid support.