Ask a consultant: Roth accounts, investment options, plan withdrawals and what to watch in 2024

What you'll get from this article

• Find the best investments for your employees.
• Simplify Roth accounts so your employees can enjoy the tax benefits and flexibility.
• Get your fiduciary house in order.
• Help employees balance withdrawing for immediate financial needs against long-term retirement goals.

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Real consultants answer real questions from real employers

When we first started “Ask a consultant,” we learned a couple of important lessons from employers. First, there’s no end to the questions you might have—and that’s a good thing. You all want to keep learning and improving. So do we.

Second, and even more remarkable, is that size really doesn’t matter. Whether you’re responsible for a few hundred employees or several thousand, you’re thinking about the same things: investment options, Roth accounts, plan withdrawals and overall priorities. In other words, this edition of “Ask a consultant” has something for everyone.

Vern Cushenbery
Chief Investment Officer, TwoWest Advisors

I always start by asking, “How do you measure ‘best’?” There’s a lot of room for interpretation with that term. Then I want to know who’s asking—is it the board room or the break room?

Too often, we hear from employees in the break room wanting to chase performance. We need to address that behavior—and quickly—by having the board room or the committee establish clear goals for the retirement plan investments.

As fiduciaries, we need to think about the employees’ goals and optimize the investments accordingly, whether it’s for the 25-year-old investing for growth or those near or in retirement who need to generate income. How do we design an investment lineup to meet those different goals and needs?

We also want to protect the board room, which means offering an appropriate level of diversification across asset classes on the investment menu. Looking back at 100 years of investment history, everything points to having the broadest possible diversification at the lowest cost. It’s worked across many different market cycles and it generally puts the plan’s investment options in the 80th percentile of returns over time.

Can you find funds to outperform? Sure, but they tend to cost more and the evidence of outperformance tends to be slight, especially over the long term.

But for some clients, finding that outperformance is important. In that case, we draw upon academic research on historical prices and statistical analysis to identify opportunities to add alpha—whether that’s through size, growth versus value or even credit quality.

Then, we look for evidence of manager skill. Can a fund manager demonstrate a repeatable pattern of outperformance consistently over time? That kind of evidence-based approach leaves the fiduciary in the strongest, most defensible position.

Ryan Campagna
Partner and Head of Sales, Sentinel Group

What’s interesting about Roth accounts is that they're widely adopted by retirement plans but not by the participants in those plans. Among corporate plans, about three quarters offer a Roth feature, but only about one in seven participants make Roth contributions in their plan. Among 403(b) plans, fewer plans allow Roth contributions, and adoption among participants is equally low.

Participants can be overwhelmed by plan decisions. They need to decide when to join, how much to contribute and then how to invest. As an industry, we make those decisions easier with auto-enrollment, target date funds and managed accounts. When it comes to Roth contributions, they really need us to make it easy.

Here’s what we tell them: Let’s not try to figure out what’s perfect for you today. In the same way you diversify your investments, making Roth contributions can diversify your tax benefit.

Rather than deciding between pretax or Roth, why not do both? By putting some contributions in pretax and some in Roth, you add some flexibility. When it comes to withdrawing money in retirement—when no one knows what their tax rates might be—you’ll have more control from a tax perspective.

One last point here: You don’t have to be a tax expert to encourage workers to make Roth contributions. Since we don’t know what the future holds, let’s plan for the unknown. Encourage them to diversify, hedge their bets on taxes and give themselves options in the future. We don’t have to decide which one is better. They offer different benefits for different scenarios.

Mark Olsen
Managing Director, PlanPILOT

Employers have a lot of retirement plan decisions to weigh in 2024, especially with SECURE 1.0 and 2.0. But there’s something every employer should do before starting those conversations: Take a moment and reconfirm you have the right fiduciary oversight in place.

In organizations small and large, there’s been incredible turnover in staff and leadership. Those changes can create a huge gap in knowledge and experience. Recently we met with a small nonprofit because the head of finance needed help. The head of human resources had left, and the finance department was left with sole fiduciary responsibility for a growing retirement plan. This organization’s plan committee didn’t meet regularly. Many didn’t know what it meant to be a fiduciary. It’s not unusual, especially with smaller organizations, but it’s a liability for any organization.

Organizations often want committee members who bring different points of view to the retirement plan—whether that’s operations, IT, administration—but often they don’t come in understanding the plan committee’s purpose or their roles as fiduciaries. They need to learn the questions to ask and the factors to consider to effectively protect the organization and its employees. Even those leading the committee may not know the issues to bring to the committee, the cadence of their meetings and committee member term limits.

This fiduciary oversight is critical for committees to operate efficiently. It should start with fiduciary training and documentation of roles and responsibilities so everyone knows why they are there. After we have these conversations with clients, the committee members start to think about what it means to protect the plan. And in the end, they feel even better about the decisions they’re making on behalf of employees.

Mike Volo
Principal and Financial Advisor, CAPTRUST

This topic is especially important right now as employers consider the new withdrawal options in SECURE 2.0. Lawmakers intended for these features to give employees more flexibility and more access to their savings, but it’s not that simple when it comes to plan design.

When talking with employers about adding new withdrawal provisions, we start by examining the plan’s demographics along with the utilization rate of withdrawals and loans—what we often call plan leakage. How many loans and withdrawals do employees take? Are certain demographics using loans and withdrawals more than others? How many ways can employees take money from the plan? If employers want to add some of the newer withdrawal features, it’s important to examine plan leakage and plan design in a broader sense.

Part of that conversation should consider money coming into the plan, too. Many plans in higher education offer a healthy employer contribution with no required employee contributions. As employers think about how employees can access their savings in the plan, it’s an opportune time to consider how much employees contribute on their own as a preemptive measure in the event of needing a withdrawal.

We also advocate for ongoing employee education and advice. A robust financial wellness offering can help employees understand the tradeoffs of taking withdrawals—not to mention the value and benefit of saving more! And plenty of evidence supports the efficacy of personalized advice.

Lastly, we need to monitor any plan changes regularly. Whether it’s on a quarterly or semiannual basis, you need to examine the impact in terms of money coming into the plan versus leaving, and how education and advice influence the decisions employees make. Then we can iterate and adjust our approach based on what we learn.

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