Trey Fairman: For those of you watching online at work, my name's Trey Fairman. I am a retirement
plan advisor, a consulting expert, and a tax attorney by training. And unfortunately, I have a bad habit
of writing short little books about areas that I speak with clients about. And I recently wrote a book
called The 6 Key Components of a Good 401(k) Plan. We're going to talk a little bit about that today.
And I think I got lucky with that, if you will, because in California, as many of you know, California is in
the third phase of implementing their state mandatory retirement plan system, called Cal Savers. And
the market has really evolved in the past 15 to 20 years, from a casual investment conversation to a
much more regulated fiduciary oversight process. And of those six key components that I'm going to
talk about here in just a quick second, the easiest one is the mutual funds.
So I also try to come at this from a different angle, if you will. And before we talk about the six parts of
this process, I'm going to tell you a quick little story. So in 2016, I was at a conference much like this,
for the American Medical Association and was speaking on stage for an hour about business owner
planning. And afterwards I was in the lobby grabbing some coffee. And in rapid fire succession, about
10 or 15 doctors came up to me, one after the other. And they were all doing very well. They owned
surgery centers and other types of centers, and they each were earning about a million dollars a year.
So under the general financial planning rule of thumb, they should be saving about 10% of their
income. And each and every one of them had what's called a Safe Harbor 401(k) plan, which means, in
plain English, they could save about $53,000 a year. They should be saving $100,000, but their plan
only allowed them to save $53,000. And I said to each one, I said, "If you could save more, would you?"
And every single one of them said to me, "Yes, I would love to save more. My financial advisor tells me
I can't. My accountant tells me I can't." And up until that point, I had really focused on working with
high-net-worth individuals, private banks. And I said to each one of them, "Under the current tax law,
you can save about $250,000 a year pre-tax, not $53,000."
So that kind of started me on this journey to really look at what was going on in the retirement plan
industry. And sort of look at where the industry is, and I got a little bit lucky. So, again, today we're
going to look at what I would call the six key components. It's not rocket science. If you know anything
about these plans, these will sound familiar to you. But using some concepts that you've heard about
today and applying it to this, we're going to sort of walk through this.
Okay. So, first and foremost I'm going to tell you, when we chat today, we're not going to talk that
much about benchmarking. You read about benchmarking all the time. Benchmarking is a great tool in
the 401(k) industry, but we're not really going to talk too much about that. What we're going to talk
about is reflecting on your plan and thinking about why you have it, what it's doing, and how it could
be better. I call that hitting pause and rewinding. We're then going to talk about how to chunk.
Chunking, if you will. Which allows you to think about what's most important to you. I think a lot of
people with 401(k) plans get a little confused or overwhelmed because of all the jargon and lingo that's
out there. So we're going to try to make that easy for you. And then without becoming too much of a
woo-woo kind of person here, we're going to talk a little bit about mindfulness and how that can really
help improve your current plan.
Okay. So before we get started, the number one rule is we're not going to create chaos. Okay? So this
isn't about upheaval, it's not about making things confusing or complex. Now, if you prefer to hear
that, that's not me. So you may get bored by what I'm about to say here. Okay.
So I'll say first and foremost, a good plan helps both employees, which shouldn't sound like a shocker
to you because that's what most people write about, but it also helps the employer. There are many
ways that it does that. We're going to talk about that a little bit. But unfortunately, what you see today
in the industry is many plans are on, as you see the bottom left there. So they're not really great for
employees, they're not really great for that employer. So what we're trying to do graphically is move it
from the bottom left to the top right.
And as you see on the right side there, the six key components, if you will, in no particular order.
Except investments, mutual funds, they're the easiest part, so that's why they're on the bottom.
Unfortunately, most people, when they look at this or talk about it, will start at the bottom, and all
they want to talk about are funds and fees. Those are important. But again, as I said, there's really six
total areas. Plan design. Taxes play into that, obviously. Educational programs or financial wellness as
well, which we've got some people here that focus on that. Plan operations and then fiduciary
oversight.
So as we kind of move into this, this is a little cartoon, which maybe some of you have felt like this
before. That's supposedly me with the boomerang hitting me in the head. I had a lot more hair back
then. But what I often find is that firms start these plans. Their advisor or their payroll company does it
as a favor, if you will. And they're sort of left to figure it out on their own. And they don't really know
what's going on, they don't know who to call for help. So these are what I call orphaned plans with
absentee advisors.
And I hear it time and time again. And I feel like I often get hit with the boomerang, which is what this
little cartoon's about. Where, at the end of the day, this is not that hard. You're going to see what I
mean by that here. But it's about trying to understand where you are and then trying to move the
needle going forward. So, again, this is not meant to be complex. This is a short conversation we're
going to have. We're not going to talk about finances at all. I have some notes here as well.
What's been interesting to me, at least what I've seen this morning with the speakers, are many of the
things that the other speakers are talking about relate to this as well. For instance, try not to have any
blind spots. You don't have to know exactly how this stuff works, but try to be aware that maybe you
don't know everything about it. And then think about where you are and where you'd like to go.
So what I would like to talk about next is sort of the common things that I see going on, which you may
have these questions. I often hear, which this would be the, what I call, plan operations part. Speakingwith individuals at companies that are in charge of overseeing their plan, saying something along the
lines of, "I'm confused. Who's in charge here?" I'm the CFO or I'm the HR director, and I know for
certain that I'm not the one that's the expert, but I don't really know who to call.
And it's almost like a “not my job sort” of thing. People pointing fingers at each other, saying, "Well,
I'm the record keeper. I'm the person that builds the website kind of thing. That's not my problem." Or,
"Geez, our employees are upset because they're getting money refunded from the plan at the end of
every year, and I'm not quite sure why that is. And I don't know how to fix that." In fact, that's a very,
very easy fix. That has to do with what's called planned design and setting that up properly. So, again,
common struggle. Just if you see it or you're there, it's, again, not hard to fix. Who's in charge? How do
we sort of understand how this works?
The second area that I see a lot also is plans have not been modernized. So think about the way that
you did your job 15 years ago, 20 years ago. I often encounter 401(k) plans that have not been
reviewed in 10 or 15 years. The mutual funds haven't changed. The needs of the business have
evolved, the life cycle of the business has evolved, the employee makeup has evolved, but the 401(k)
plan hasn't evolved. There have been a lot of improvements, not only in cost structure and investment
options, so those easy fund and fees, but options that allow recent graduates from college to repay
part of their student loans, possibly, through their 401(k) plans.
The, what's called, FinTech movement. Companies driven by technology, driving down the cost to
administer plans, coming up with solutions that your employees can get access to on their iPhones.
These companies are not insurance companies. I came from that insurance industry, and insurance
companies, just by default, were the first large institutions that managed 401(k) plans because they
were the only ones that could really aggregate all of the data. It doesn't have to be that way.
And then finally, which is sort of where my book came from, not really understanding what a good plan
looks like. So in its simplest level, if you think about what a good 401(k) plan looks like, a good 401(k)
plan should be easy to administer, easy to oversee. It should be cost-effective, it should be efficient,
what I call frictionless. And I think the real point that then hits home is it should be harder to fail than
to succeed in saving money. So the easier you can make the plan, for both you, if you're overseeing it,
and your employees, the better off everyone's going to be. And that's not really that hard to get to if
you kind of approach it, I think, through a very logical process. And I think it's important that you start
that process by sort of thinking, if you will.
So we actually use cards. There's six of them, no shock. So we have one card for each of those six
areas. And when I meet with those in charge of plans and we talk about the plan, some of the things I
talk about first are, "Hey, let's just think about what we're doing here. What's the biggest problem for
you today?" And that could be anything, right? I don't know who's in charge. Our participation's no
good. My neighbor's a stockbroker, and he tells me that the mutual funds are bad. Each company has a
different reason that their plan may not be good or that they're frustrated with it.
And what I find, unfortunately is that a lot of us in the industry want to jump right in and say, "Look,
here's why I'm the smartest. Here's why I think you should change." And what we find often is thatchanging from one platform or one record keeper, meaning going from John Hancock or ADP's 401(k)
to another 401(k) platform, that's the same thing. It doesn't fix it. And the reason it doesn't fix it is
because we haven't really thought about what's going on. We haven't really stopped and said, "Okay,
let's just pause for a second, think about why things are going well or not going well," which I call
rewinding, "and then let's think about what is the best way to go forward."
So, if I'm being honest with you, it's not a complicated process. But I think it's important to note that in
our cards, so if I was to show you our cards, if we're meeting face-to-face, and I'll show you what the
Covid answer is that we've been using, but we have six cards and we're putting them out on the table.
And each card has, on the back of it, one of our six key areas. And we use it as a way to sort of facilitate
the conversation.
And what often comes up is I hear stories that, "Well, I'm concerned about 401(k) lawsuits," or, "I'm
concerned about this," or, "I'm concerned about that." And what this slide's meant to really talk about,
and what I often bring up sooner than later is, "Look there's no fear card in our deck. There's nothing
to be worried about." To make a mistake as human. So part of overseeing a good 401(k) plan is using
what's called a prudent process. And it, in effect, makes sure that you do the right things at the right
times and for the right reasons. You don't have to do that stuff every day. You don't have to do that
stuff every month. It's definitely not a, "Call me when you need me, or I'll check in with you in three
years," kind of thing.
I would tell you that overseeing a plan shouldn't really be that hard once you get it set up and rolling.
And that typically involves quarterly investment reviews, and then at least a once a year state of the
plan conversation, that's how we would do it. And then at least once a year, meeting with the
employees and kind of helping them understand what's going on.
Some current examples for you, with the craziness that's going on right now with the investment
markets, we've started to do employee meetings over Zoom and record them and send out the link. I
just was on a call last week with a bank, and the bank said, "Trey, we're really busy. We don't have
time to do this." And automatically, I didn't really even think about it before I said it, I said, "Well, that's
okay. Why don't I do the meeting on Zoom, record it, and I'll send you the link." So it's the same sort of
information, but it's using technology to get that information out there in a much more user-friendly
format.
One of the other things that I found, and it was interesting to see them here, about a year ago, we
engaged a financial wellness firm to offer some services for employees to understand budgeting, cash
flow planning, college savings. And this firm has hundreds of hours of videos. They actually have a call
center, with financial planners that are paid salary, to help employees ask questions that, if we're
honest with each other, those employees probably aren't asking in the lunchroom when we're doing
the annual 401(k) meeting. So if you think about, again, where your plan was, where it is today, and
just say, frankly, "Look, no one's perfect. And what steps do we need to take to move the needle
forward?" It really is not that big of a process.So, pre-Covid, as I said, we had these great cards that we would use. As we've all become experts with
Zoom, right? What we now do is we would put up on the screen, as you can see here, each of our
cards, in whatever random order. And we would put a timeline on the screen and we'd say, "Okay, let's
pause. Rewind for a second. Tell me what the biggest complexity is in your plan right now. Or talk to
me about what's changed in your company over the past five years that has really made it easier or
harder in overseeing your current plan. We can talk about investments if you want." We can talk about
costs if you want, but those are the easiest part of this.
And then let's also say that it's not going to be fixed tomorrow. And frankly, the way that I can usually
move the needle the most is to keep your plan where it is and allow me to either be hired as a
consultant or to step on board as the actual plan advisor. And let's try to fix your plan from the inside
out. Okay? Let's not create chaos. Let's not go into a blackout period and move your plan from this
provider to that provider ,and send out all these notices about why the American funds, target-date
funds are changing to the T Rowe Price funds, and all those that nobody really understands. Let's think
about what's the most important area for us to address first.
And then what will happen is you'll see sort of a migration here, where, and this is from a call I had
about two weeks ago, three weeks ago maybe, and to this firm, and this is actually interesting, but to
this firm, they were at least concerned about the education programs. They felt like they had a pretty
good grasp on that. They were doing some things to help their employees understand what their plan
was able to do for them, what it had done for them. Their plan was actually pretty well priced as well.
But you see on the far left-hand side here, what do we need to think about today? And the first thing
that we need to talk about, and actually this conversation started with, it's a business that's owned by
a friend of a friend, named Travis. And when I asked Travis about the point, he says, "Trey, everyone
wants to talk about the 401(k) plan. You guys are all the same." And I said, "Well, Travis, I don't know
about that. I'm interested in talking about what your biggest challenges are." And I just happen to say,
"For instance, some plans have the wrong structure." And an example would be they get refund checks
every year. Now, technically speaking, that's a highly compensated issue that isn't that hard of a
problem to fix. And Travis's eyes opened up, he goes, "You know about that? You can fix that for me?"
And I said, "Well, sure, Travis, I can fix that for you. That's just a plan design problem."
This is a company that's been growing very, very rapidly. And again, as I was saying earlier, they didn't
know who to talk to for help. They didn't know who was in charge, but that was their biggest challenge.
Not that big of a challenge, frankly, at all. And then as I just said too, that other box on the left is who's
in charge? So there's a lot of, back to that prior slide I had about fiduciary oversight, if I was being
honest with you probably, all advisors talk about funds, meaning the mutual funds, fees, and fiduciary,
meaning who's sort of overseeing this? Who's in charge?
And if you use a specialist that focuses in the 401(k) area. Now, there aren't many of us floating
around. So, industry studies would tell you, of all the hundreds of thousands of financial advisors that
focus on retirement planning, only about 1.5% of them oversee 10 or more 401(k) plans. So only 1.5%
of financial advisors sort of focus in this area. As I said earlier, this industry, meaning the 401(k)industry, has really evolved from a casual, informal investment conversation to a much more regulated
fiduciary oversight process. It's not complicated, it's not rocket science, it just has some things that we
need to watch out for.
So that was one of their concerns as well. They had just brought on a new CFO. He knew that this was
not working properly. He knew for sure because his employees were complaining about the refund
checks. But he also knew, well, who's in charge? Who do we talk to? Who oversees this? Who's doing
the benchmarking, if you will? And nobody knew who that was.
So for this firm, their answer is what you see on the screen. That answer for your firm may be totally
different. It may be everything's fine. We love everybody and everything's great. That's okay too. But at
least knowing that or making that intentional decision is really what this is all about.
I'll give you another quick story. I met with a plan that they hadn't really done anything in 10 or 15
years. And they had 23% of their assets in a very expensive guaranteed account. And I said to the CFO,
"Well, okay, so help me understand why everyone's in that cash account." Now, this was before the
markets just went south, right? So this was about a month ago, when everything was going well. And
his answer was, "Well, what do you mean? It's been doing really, really well. It's guaranteed." And I
said, "Well, it's probably guaranteed at 3%. It's very expensive. But if you really want to earn that,
that's okay. That's probably the best place to be." And of course, his response was, "Well, I don't really
know why we're there. That's just what they say we should do."
Okay? So it's not that you necessarily have the worst thing or you should be worried that you have the
worst thing. It's about understanding what a good plan looks like and then what the steps are to get to
where you need to be. So what I need you to think about is where you are today. So of those six key
areas that I talked about, you can forget the funds and the fees part of it. Think to yourself about who's
in charge? Of that graph, okay, where is your plan? Where do I fall?
And then I think what's the key part of this, if you will, is asking yourself some questions about how do
I get a better plan or how do I do better? And the most important questions I would tell you are not
probably the standard questions that you've already been asked or that you always hear. It's not,
"What did my mutual fund do last year? What's my expense ratio?" Those are all important, for sure.
The questions that are the most important to ask, I think, is, again, where are you in the lifecycle of
your plan versus the lifecycle of your business? Is the structure of your plan meeting the needs and the
structure of your business. An easy way to think about that is, a company that has a lot of 25-year-olds
that just graduated college with a lot of debt, that plan's going to have different features and be
designed differently than a very small law firm that has two partners that are 60 and a paralegal who's
30. So it's not all plain vanilla.
The other one I think that really, I think, causes some pause is, and I don't really have the answer to
this, but why is it that health insurance, your employee benefits plan, which I would say the 401(k) plan
is part of, that's reviewed every single year. Every fall we go through that process, we all look at that,
we bid it out. And why is the 401(k) plan kind of ignored? Where's that conversation?Now, there's some real easy answers to that, and that's not important for us to really chat about today.
But Meg Pogue, I was in a breakout earlier with her, and she was talking about nuance. There's a lot of
nuance here. And I think what's important to realize is, the same way you think about your employee
benefits and how you review them and how you manage them, for whatever reason, the 401(k) has
sort of been left out of that conversation. And if you really kind of pause and think about these cards.
Now, these are special cards. You can't buy these anywhere. But think about what's important to you
and sort of organize that for what's best for you. You'll find that it's easier than you think to create
your own good plan.
So if you'd like to learn more, I have a little website called goodplan.info. You can go there. There's
some short videos. You can get a copy of my book, which is only 34 pages. It's not really even a book,
it's more of a primer.
Well, again, my name is Trey Fairman. I hope you can create your own good plan. Please feel free to
learn more at goodplan.info. Thank you very much for your time. I appreciate it.This transcript has been edited for length and clarity and all statements were general in nature.
Laws have changed since the recording date, so please consult a qualified advisor regarding your
specific situation.