How do you measure success?

How do you measure the success of your 401(k)? Most of us would probably answer “great investment performance” but very few business owners have any idea how their overall 401(k) plan has actually fared.

To find out, look at your IRS Form 5500, Part III, Line 8b “Other income (loss)”and divide that number into the plans balance at the start of the year.

Measure this plan performance against a reasonable benchmark.  When I say “reasonable”, I simply mean that it does not make much sense to just say that you beat or underperformed the S&P 500 stock index because none of your plan participants should be invested 100% in stocks.  It would be more reasonable to look at the average age of plan participants and then match that age to the appropriate Vanguard/T. Rowe/Fidelity Target date mutual fund and use that as your customized benchmark.

When I do this exercise for business owners, I often identify a huge performance gap.  The plan does much worse on average than the appropriate target date fund.

Since participants are free to pick there own investments, you might be tempted to blame poor plan performance on them, but instead, I would tell you to demand more from your plans advisors.  The solution to poor plan performance is two fold:  First, make the plan menu simple for people to do the right thing.  Have lots of low cost, diversified portfolios people can choose from like target date and balanced funds and then consider having people automatically invested in them unless they direct otherwise.  Second, demand better investment education for your employees. Go beyond boring enrollment meetings and drill down into individual participant accounts.  Look for those people that have extreme (100% stock or 100% bond) allocations and target them for follow up information.

Every business owner thinks investment performance is important but very few people actually measure it.  Do you know how your overall 401(k) has done?