Nearly 80% of credit union 401(k) plan participants have all or some of the retirement savings going into a target-date fund. The concept is certainly attractive, offering an entire portfolio with automated rebalance features for those who are less comfortable with self-managing their investments. But is the target date fund a one-size-fits-all solution suitable for every employee? Our next “C.U. on the Show” guest works with credit unions to build solutions that help employees at every level of the organization prepare for retirement. Phil Westhoff leads the Qualified Plan Advisory Group at Stearns Financial. He consults with credit unions in designing customized retirement plans to help attract and retain top talent while cost-effectively protecting the plan sponsors.

In this episode, Phil and Doug dig into the details as to why investing entirely in a target date fund may not be appropriate for every employee—namely executives. As a credit union executive, you’ll probably have more than one source of income when you retire, beyond the traditional 401(k). These may include accrued leave benefits, bonuses, split-dollar plan, and 457(b) plan.

On the other hand, non-management employees may rely solely on a 401(k) for cash flow when they retire.  This immediate need upon retirement versus the ability to rely on other forms of retirement income for several years are vastly different investment approaches. Phil and Doug discuss why an executive may reconsider using a target-date fund at all. 

Phil also discusses the glaring gap he noticed when first working with credit unions. While many credit unions have a high participation rate, the amount employees save and the deferral percentages are generally much lower than the industry average. What’s missing? Phil offers some insights, such as a lack in plan design features and overall education among plan sponsors and participants. Understanding employees’ financial needs is also critical.

Phil cites that 80% of the credit unions he has worked with have had the same retirement plan provider for several years without making any recent adjustments. As a result, these credit unions are probably missing out on cost savings, and their overall plan design has not been updated to benefit plan participants. One example he provides is incorporating a higher enrollment deferral percentage for employees that automatically increases each year. This is a much more efficient way for employees to reach a reasonable savings percentage to replace their pre-retirement income.

You’ll also learn how to optimize your retirement strategy, considerations for your employees, and new retirement plan features, as well as legislative implications that are on the horizon. Stream the episode for the full details.

Audio Transcription (pulled from the podcast)

Doug English: (00:03)

Hello credit union executives. Welcome to “C.U. on the Show,” where we give you up-to-date information on how you can reduce risk, keep key talent, and take a strategic approach to your personal financial wellness. Hosted by me, Doug English, a CERTIFIED FINANCIAL PLANNER™ professional and former credit union insider with Act Advisors.

Doug: (00:30)

My guest today is Phil Westoff. Phil leads Sterns Financial’s Qualified Plan Advisory Group, where he helps credit unions create custom qualified retirement plans to help attract and retain the best talent while protecting the fiduciaries in a cost-effective manner. In this episode, we talk about strategies to help your employees save for retirement. What to consider when choosing the target-date fund suite for your plan and why as an executive, you should rethink your 401(k) strategy if you’re mostly investing in target-date funds. Hey Phil, tell me a bit about how you got into working with credit unions and what really stood out about credit unions to you? 

Phil Westoff:

Well, so when I was looking for a new opportunity, I met with Eric Stern, who runs Stearns Financial, to discuss some of the challenges that credit unions have. And when I did my own research, I found that credit unions have for their 401(k) plans the highest participation rate out of 48 industries, but they are 41st in average account balance and 43rd in deferral percentage.

Phil: (01:44)

It seems like a huge gap. It seems like there’s a real need for credit unions to be potentially educated more, both on the plan sponsor level and on the participant level. 


So I want to make sure I understand what that means. What was the first highest in participation? So what does that mean? They’re doing a good job with getting people into the plan?


Exactly. Yup. So they’re doing a great job, whether it’s with automatic enrollment or just letting them know about the plan, plus they’re in the financial services industry. So, they probably understand it’s important to get involved with the company 401(k) plan. 


All right. And then the next metric was about 40%—that’s their average participation level as far as how much they’re putting in. Is that what it was? 


Yeah, exactly how much what’s it? What’s the deferral percentage. So for credit union employees on average it’s 5.9%. On overall industry, it’s 7.1%. And the average account balance across all industries is a little bit over a hundred thousand now. And for credit union employees, it’s close to 60,000. There’s a big gap there. So they’re doing a great job getting into the plan, but there’s something that’s not allowing them to save enough for what they need in retirement. 

Doug: (03:00)

Yeah. I mean, generally I know when we run financial analysis for folks, you know that little rule of thumb, right? You need the 60 to 70% of your pre-retirement earnings to be able to have a reasonable retirement lifestyle and a 5 to 6% contribution rate to the 401(k) is probably not going to get you there.

Phil: (03:13)

Probably not. Yeah. So the rule of thumb in a 401(k) plan was trying to get to that 10 to 15% range between what the employee’s putting in and what the employer’s putting in. So there’s some room for improvement for sure.

Doug: (03:36)

Do you have an inkling as to what might be the cause of that gap?

Phil: (03:38)

Yeah. So my impression is lacking a little bit in the plan design features. Plan design typically is the number one thing that’s gonna push people to save more. That means they might be doing automatic enrollment, but are they setting their automatic enrollment at 3%, where the rest of the industry has kind of moved to maybe 6, 7%, with an automatic increase program set in place? The other thing I’ve noticed is 80% of credit union plan sponsors have been with the same recordkeeper for over seven years, which is far and away, the highest in the industry. I don’t think it’s smart to continue to jump from recordkeeper to recordkeeper, but if you stay with the same recordkeeper for a long time, maybe the costs are a little bit higher and maybe they’re not getting the attention that they probably need. 


Yeah. It’s frustrating that you have to change to get attention. That’s not how it should work. 


Right. I totally agree. But it’s almost like working with the cable company or your phone provider. Sometimes you have to make that switch to get the intro rate or whatever it might be, but there has to be some kind of movement to create those lower costs. 

Doug: (04:52)

Interesting. You said that the idea might be to raise the automatic enrollment percentage and also maybe raise the automatic increase percentage. 

Phil: (04:56)

Yeah. So if you look back 10, 15 years ago, automatic enrollment was kind of a new thing. So there were plan sponsors kind of hesitant to automatically put their participants in the plan. So they’ll do it at 3%. It’s something that’s not going to be a huge impact. And that stuck around for a long time. But in the past five, six years, we’ve gotten a little bit smarter about it. And most participants aren’t balking at 6, 7, 8% for automatic enrollment. Once you get above that, they might pop out, but putting them in at 6 or 7% is totally doable. I don’t think many people will opt out. And then you put an auto increase program at it, maybe 1% every year on your birthday or some specific time, and that’ll get you to that 10 to 15% goal. 

Doug: (05:49)

Yeah, that would be in their interest. Whether or not they like it is another matter, right? Let’s shift gears a little bit and talk about the presence of target- date funds in a 401(k). Talk to me a bit about the utilization of them and that stuff.

Phil: (06:08)

Yeah. So, I guess the new studies or new, I guess, white papers out there are showing that almost 80% of plan participants have all or some of their money in a target-date fund. So it’s really important from the plan sponsor’s perspective to get what suite they have available to the participants right. And I have found over the years when I consolidate and work with credit union executives and planned sponsors that the target-date suite that they have available, oftentimes it’s the same as the recordkeeper. So if they’re with Principal, it’s the Principal target-date suite, if it’s Fidelity, it’s a Fidelity target-date suite. And it’s usually because they get maybe a little less cost for the plan, but obviously you didn’t go through a process to evaluate, choose that one. That’s the right one. Right? So I just think it’s really important to have some type of process to figure out which target-date suite is best for your employees and have it documented as a fiduciary.

Doug: (07:07)

Let’s dig into that a bit. So 80% of dollars in 401(k) plans have some kind of participation in a target-date fund. And I know from when I see folks, the way they’ve built their 401(k) is they often make unusual combos, right? They’ll buy a 20, 30 fund and then combine that with whichever three stock funds made the most last a year.

Phil: (07:34)

Okay. Yep. I’ve also seen the 20% and the 20, 35, 20% and the 20, 45%, 20% and the 55 thinking they’re being diversified. But in reality, they’re kind of taking away from the goal of those target-date funds.

Doug: (07:50)

Yeah. And now the target-date funds come in different flavors, too. Can you talk a bit about those?

Phil: (07:55)

Yeah. So when you’re thinking about target-date funds, you really gotta think about the glide path and glide path means how and when the equity to bond ratio changes. So some target-date funds, for example, BlackRock Index Lifetime Fund is really popular. And that starts out at almost 99% stocks, and it’s far away the most aggressive starting off. And then you might look at Fidelity, which is an active management, and they start at 85%. And their end goal at retirement at 65 or 67 is going to be way different. It could be 60, 40 stocks to bonds or 40, 60 stocks bonds. So I see a lot of times organizations or plan sponsors comparing the two against each other as far as returns are concerned. And obviously you can’t do that when the equity exposures are so much different.

Doug: (08:51)

How would you guide a plan sponsor to select between the various target-date fund providers?

Phil: (08:56)

Yeah. So that’s a great question. And it’s a difficult one to answer because you really have to have a pulse of your employee base. Are they big savers? Is your employee base going to have money outside of what they have in their 401(k), or is what they have in your 401(k) likely going to be their only retirement savings? So if your employee base might have retirement savings in an IRA or a pension with another company or something along those lines, then the target-date fund that has more equities at retirement might make more sense because it gives you more growth in retirement for those 20 years that you’re going to live past retirement, thinking that you’ve got other sources of income coming in. If you’re on the flip side of it, your employee base is probably, this is all they have saved and they might need liquidity at retirement. So something that’s more conservative makes more sense. 

Doug: (09:50)

Sounds like a real education challenge, whichever one of those you do choose as an organization, then educating your employees about how they work because they all look the same on the cover, right? It’s all a 20, 25 fund or a 20, 35.

Phil: (09:59)

Right. Well, and that’s the tricky part. Education is really important for the employees and the plan sponsor because they’re obviously going to look at all the different target-date funds out there and be like, well, this one’s performing better. This one’s cheaper. Why don’t we go with this one? Well, they’re not thinking about the risk-adjusted returns. They’re not thinking about the longevity of the target-date suite. So it’s educating everybody about target- date funds and how they differ from a normal mutual fund.

Doug: (10:34)

I’m looking at sometimes under the cover of the target-date funds. I think it’s interesting. One of the major providers in the 401(k) industry for credit unions, I’ve had the opportunity to look at their standard lineup and they have a variety of funds that are okay. Tend to be their brand. But then if you look in the target-date funds, there are a whole bunch of non-proprietary funds, funds from other providers and actually much better funds, right? So the surface of the target-date fund is interesting, but the inside can be a whole different world. 


Yup. So a recordkeeper, they know that 60 to 80% of flows are going into target-date funds. So that’s all they care about getting in the lineup. So Fidelity wants their freedom funds in there, Principal wants their freedom funds in there. Go ahead and put whatever else do you want for the rest of the lineup, because money’s not flowing into those investments.

Doug: (11:31)

So they’re really pushing those. And it’s easy for a plan sponsor to say, well, yeah, why not? Target-date funds are target-date funds, and we’re going to get a lower cost on our recordkeeping services—let’s do it. But I think in the long run, it might end up hurting the plan participants going that route. 


And now let’s shift again, to focus on the executive suite of credit unions. Do you have any data around participation rates for the executive suite or contribution rates or utilization, any of that kind of thing that’s specific to that senior area?


I don’t have anything broken down specifically, but I will say that most credit union plans I’ve seen are what they call safe harbor plans, which makes me think that these executives are looking to put away as much as they can, for their participation rate will tend to be a little bit higher or deferral percentage will be a little bit higher as well.

Phil: (12:24)

So as far as whether or not they’re investing in target-date funds or not, I’d imagine quite a few of them are. Whether that’s the right way to go or not, I’m not sure, but yeah, I would imagine that they’re in the target-date funds just like everybody else. 


Yeah. I mean, I think the idea potentially makes sense. The idea of a whole portfolio, instead of leaving it to the participant to design a portfolio that they’re really not suited to design. And then to have it automatically change because most participants will put the money in there and then go back to working or to doing whatever they’re doing and just never really pay attention to it—never really adjust it again. Right. Exactly. Yup. Say, but for the executive suite, what I think is very significant and different is again, when we do the analysis for their outcomes, the 401(k) is often a minority of their retirement income.

Doug: (13:25)

And so, I would guide the executives to kind of look at it in a completely different way and your description of the various target-date funds, some of them are more conservative and that would be maybe more appropriate for rank and file employees that are completely relying on that to replace their income. That makes total sense to me, but the executives hopefully have the collateral split-dollar plan may be a 457B plan. And as you probably know, the 457B is subject to the risk of the employer. That’s part of their credit spectrum. And so, most of the time that 457B is going to get paid out within the first year or two. Right? 

Phil: (14:08)

Absolutely. And you know, those split dollar plans, a lot of them are going to be tax-free distribution. So keeping those 401(k) dollars in there as long as possible would make total sense in that situation, which would make you think that plan should be a little bit more aggressively invested. 


Exactly. That’s exactly what I see. It’s not unusual to see an executive come out of a credit union at 62 to see them live on personal savings, a bonus annual leave, sick leave from 63 to 64, something like that. And of course the 457B also pays out in that period of time. And then they turn on the collateral assignment, which provides this a wonderful tax-free income stream, and they don’t have any need for that 401(k) until 70, 72, depending on what the rule is by that time, that RMD. And I agree very much that if they follow the rule of thumb, when you use the target-date fund for retirement age, they’re very likely to be not getting as much potential return as they should. And in fact, I’ll be interested in your take on this, but generally our guidance is to take your new money going into your 401(k) and put that new money in the most aggressive target-date fund offered by the plan.

Phil: (15:32)

I think it makes complete sense, especially the way you laid it out. Those executives, having all those different benefits coming, why wouldn’t you, it makes sense to me and kind of treating your retirement day, quote, unquote as 15, 20 years past your actual retirement date. 

Doug: (15:53)

Yeah. The new money going in is just designed to benefit from dollar cost averaging and all the variables. And then the idea is to annually take from that more aggressive account and go into a more traditional 60, 40 blend or something like that, where you’re protecting your principal and just going maximum risk with new money only. 


Yep. I agree with that. I think it makes total sense. And that’s why education is so important. In a credit union, we have two kinds of groups of people, the executives and everybody else, and everybody is important in that credit union. Everybody needs guidance appropriate for their situation. So they’re not one-size-fits-all plans. 


Yeah. You need to have the plan, have the best results with the lowest cost, and it sounds like that’s a constantly moving target. 


Yes, absolutely. 

Doug: (16:53)

Yeah. Is there anything new in a plan design or coming in plan design you can talk about?

Phil: (16:57)

One thing that I’ve been hearing quite a bit about, and it’s going to be specific on how your plan is set up, is the mega Roth feature that could benefit executives. So in a situation where an executive is looking for more ways to save Roth money, you can set up a 401(k) plan with an after-tax option. So in a 401(k) plan, you can have a Roth 401(k), contribute up to the maximum level. So if you’re over 50, you’ve got the regular and then the catch-up contributions. Once you hit that limit, you can’t do any more Roth or pre-tax money. But if you have an after-tax option in your 401(k) plan, you can put in an additional 20, $22,000 of after-tax money and immediately convert it to Roth before it has any gains on it.




That way, you have potentially 30, $40,000 in Roth money. So that is the new hot topic. Now, unfortunately, a lot of the small plans do not have that set up in their 401(k) plan, but I think that’s something that’s going to happen quite a bit going forward and recordkeepers are going to be kind of pressed to make it available. And I’ve already seen some that are doing it.

Doug: (18:21)

I want to feed that back to make sure I got it right. So you are, again, you’re in the executive suite, you’re contributing the maximum to the traditional 401(k), let’s say, cause that’s what most folks do, and then you contribute another $22,000 in an after-tax account that goes into the 401(k) same investments in the 401(k), but not taken out of your paycheck pre-tax. Is that all right?

Phil: (18:44)

Correct. So it’s all coming out of your paycheck, but after-tax. Yes. 


Okay. And then each year you make a conversion distribution from the 401(k) into your personal Roth. Is that how it works?

Phil: (18:59)

So there’s two options. So if your plan allows for in-service distribution, you can roll it into your Roth IRA or some 401(k) plans allow a Roth conversion. So you keep it in your 401(k) plan and you convert it from after-tax into the Roth. 

Doug: (19:16)

Oh, that would be better just from a simplicity standpoint, right? To do it right within the plan. 




Love that idea. Now of course, I’m sure you know that part of the proposed rules from the Biden administration are a complete change in the way we deduct contributions to the 401(k). So, you know, right now you contribute pre-tax, it goes into your full effective rate. If this proposal passes, 26% would be the maximum credit you would get for contributions. So if you’re in the 39% bracket, you’re only going to get a credit effectively at a 26% rate, meaning that when you file your taxes, you would have to pay additional tax on the spread between your effective rate, 39% potentially, and the 26% cap. So if that passes, I believe that our guidance to our credit union executives is going to be to switch all to Roth. Right? 


Yup. I would agree. And I hope that doesn’t pass. First off, it doesn’t make any sense. It’s complicated. And secondly, it’s just going to make it more difficult to reach retirement goals. And it’s difficult for executives and folks that are making more money to save enough for retirement. And that’s just going to make it harder. 


Absolutely. Well, thank you. Thank you for the insights, for helping the leaders of the credit union movement. Any final thoughts for our listeners?

Phil: (20:45)

I’m just very happy to be on the podcast with you today. I’ve really enjoyed it. Check us out on That’s where you’ll find us. And thanks to you, too.

Doug: (21:02)

That’s all the insider credit union knowledge we have for this episode. Can’t wait for the next episode. We’re always available through our website at That’s See you next time on C.U. on the Show.

Speaker 3: (21:25)

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual security. To determine which investments may be appropriate for you, consult your financial advisor prior to investing. Economic forecasts set forth may not develop as predicted. All performance references are historical and are no guarantee of future results. Indexes are unmanaged and cannot be invested into directly.

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