Funds, Fees and Fast Food
We admit we were surprised by Jerry Lynch’s answer to a question about his due diligence and evaluation process. “All of our plans use one of four target-date fund families.”
In an era of open architecture and menu choice (and customization) it got our attention, but—after a thorough explanation—made perfect sense.
“I’m gonna tell you a stupid story then I’ll back into this,” the president of New Jersey-based JFL Total Wealth Management colorfully began. “I used to play soccer in school with this kid who knew how to do a bicycle kick, a scissor kick, he had about 14 different kicks. He was a terrible soccer player because every time he tried to kick the ball, he had 14 thoughts in his head, and 90% of this stuff was kicking the ball to the open man.”
Commonly called paralysis of analysis, it certainly applies to the target-date space.
“When I’m looking at target-date funds, there are so many different things that are out there; peer rankings, expense ratios, performance, and glide path. Generally, these funds are in the 90th percentile in terms of performance. If we go out and add more, it’s going to make the employer’s decision impossible.”
At the end of the day, he adds, employers want reasonable fees, strong manager tenure, solid performance, and to know their employees understand and accept it.
“If you get something that has the name recognition that the employees like and will use, I think you’ll get better participation than if you choose a fund that, in theory, is better but that they’ve never heard of.”
The firm works with everything from fast-food restaurants with generally low participant rates, to pharmaceutical companies with extremely high participation rates. The key is about sitting with trustees, figuring out what they’ve got to work with, and making it better.
“My goal isn’t to get 80% participation across the board. With the fast-food shop, it was 40%, and once we hit 40%, we try to see if we can bring it up even higher. With the pharmaceutical company, you almost have everybody joining to begin with, so we use different standards to know whether we’re doing a good job.”
The restaurant group naturally presented a challenge, because it was part of a larger, publicly traded group and restaurants “are awful for 401k plans.”
Lynch and his team were tasked with creating a plan that was reasonably priced, allowed executives to defer income and provided a safe harbor match plan for the non-highly compensated employees; no easy task.
“It was priced in a way that allowed the restaurant group, which has very thin margins, to be able to offer the match. It ultimately satisfied the highly compensated, because now there were no limitations in terms of what they could defer, and they weren’t getting money back at the end of the year. It did increase participation, especially at a lower level, which was something that they wanted to do.”
Admitting he’d never seen that type of plan design before, it was a function of a repeated back-and-forth with the actuaries with whom he works.
“It hit every one of the buckets. I don’t think it’s a perfect solution, but it’s pretty good. They’ve kept that plan design for the past seven years and it’s worked tremendously.”
Jerry Lynch is President and Founder of Boonton, New Jersey-based JFL Total Wealth Management.