Context is Worth 80 IQ Points

“Are you a fast runner, Daddy?”

The question takes me back to the peak of the athletic career I never had: high school. At some point in high school, I clocked a 4.9 in the 40 yard dash – a respectable showing in that era.

“Once upon a time,” I reply.

“But you still beat me when we race,” our seven-year-old states with a mix of pride and dismay.

Yes, as long as the race in question is run on a flat, straight path I can still outrun just about everyone enrolled in elementary school. Should the race, however, involve irregular terrain or, even worse, more than one gentle turn, my odds decrease dramatically.

At some point all-to-soon, I will no longer be able to outrun our kids, even on a straightaway. Until then I can probably manage to hang on to my status as “fast” provided that our kids don’t see me in a race against anyone older than 11 in the interim. My chances of avoiding that kind of race are good, as I long ago realized that the only runner’s high I achieve is the momentary thrill I experience when I get to stop.

Descriptors like fast are, in my view, problematic for the same reason that ratings for things like 401(k) plans are unreliable: they lack context. Usain Bolt can easily be labeled fast in any comparison involving another human, but when his results are viewed against animals typically identified as fast they pale in comparison.

The number of firms that publish ratings of 401(k) plans is small, and their findings, therefore, receive a disproportionate amount of attention. The results, whether good or bad, often lead to questions from clients, and their participants, as to why their plan received a particular score.

I am privileged to serve as the ongoing retirement plan advisor for a number of firms. In my role, I actively gather information for my clients regarding the performance of their investment offerings, the nuances of their plan design, the generosity of their contributions, and the fairness of the fees paid for recordkeeping and administrative services. Context plays a very important role in my work as, for example, the recordkeeping fee that can be negotiated for a multi-national employer with 10,000 domestic employees is considerably less than what can another employer with 200 employees can obtain.

Moreover, the 401(k) plan is just one of many benefits any given employer funds, either partially or completely. While a ratings service might declare that a particular 401(k) plan is sub-par, this same service typically ignores the other dollars being spent on other important benefits, such as a defined benefit plan, the percentage paid on behalf of an employee’s healthcare benefits, base compensation, bonuses, and equity award plans.

At a personal level, there is also the reality that each employee likely places a different weight on the compensation and benefits being offered that is unique to their particular situation. What matters most to a 25-year-old employee with no dependents is very different than the priorities of a married 45-year-old supporting a family of four.

A 401(k) can, hopefully, make a significant difference in an employee’s future. Here’s a quick roster of the other elements that may also play a key role:

Base pay
Average annual increases
Availability of overtime
Ability to move-up within the organization
Pension (defined benefit plan)
Employee stock purchase plan (ESPP)
Stock options
Paid time off policy
Commute

It’s rare that an employer can afford to offer all things to all people. It’s equally unlikely that the recipients of these benefits value them similarly.

Thomas Shadwell is credited with stating, “No man is happy but by comparison.” Theodore Roosevelt in turn offered that, “Comparison is the thief of joy.”

I close by repeating what Alan Kay already penned, “Context is worth 80 IQ points.”