Opinions on the "401(k) Plan of the Future" - unlimited inve

[Guest tschenk]

I would love to hear some opinions of what's been getting hyped lately as the 401(k) plan of the future.

Briefly, a participant could open up a 401(k) account at virtually any brokerage firm and have the whole world of investments to choose from - like an IRA, for example. Then (I believe) the broker would generate a "5500k" for the individual like a 1099 at the end of the year. I presume company matches would be directed to the respective broker /dealer.

What percentage of the participant population do you think will benefit/suffer from having his or her investment horizons opened up to unlimited choices?

[MoJo]

Another interesting topic! I've heard Ted Benna, and David Wray both proclaim that this would be the greatest thing since sliced bread. Maybe. Maybe not. I have reservations about such a scenario - as I do about brokerage windows within current 401(k) plans. We seem to not believe in the ability of participants to manage their money - and spend oodles of money to educate them, or advise them because of this. Yet, we seem to always increase the opportunities for them to mismanage their money, by adding additional funds, options, and now even providers. I scratch my head and shutter thinking about what messes this will create, and then wonder whether anyone cares, or more importantly whetehr anyone, in particular employers, should care. Since this becomes the primary retirement income producer for most families (anyone install a DB plan lately?), and is now the single biggest family asset for most, we should from an economic perspective care - failure to invest wisely causes economic depression - is the headline.

Well, enough philosophising. Think Congress will change the law to allow this (I know - 403(B)'s have had this for some time - but does anyone really beleive that those plans are in compliance?)? Think employers want to give up the control? Vesting? Eligibility? Some will. Some won't.

Certainly a radical shift in benefit philosophy would be required.

[Kirk Maldonado]

I think that it would cost a fortune to have such a plan audited for Form 5500 purposes.

Also, I don't see how, as a practical matter, all of the substantive rules could be applied uniformly (e.g., the distribution options, loans, etc.)

In short, I am very skeptical that it could actually be operated both in accordance with applicable law and in a cost-effective manner.

[Guest]

I deal with lots of firms that administer 401(k)plans in a daily environment, and the self-directed brokerage accounts (SDA)are certainly becoming more popular. They cause special problems if you allow the participant to use any brokerage firm they want. There needs to be automation between the recordkeeping systems and the brokerage firm and the more there are the more difficult this becomes.

Unfortunately, I think Ted Benna's new found religion with allowing SDA for participant's is being motivated by the fact that he sits on the board of mPower, one of the premiere Internet advisory services. Of course he wants participants to use their service and have brokerages available. Certainly, this is just my opinion, but did we really here much about this until all the Internet intermediaries became available.

I can't imagine most participants being able to handle their investments in this manner. Most want just a few choices, and they want someone else to make the selection for them. They will just not spend the time that it takes to invest wisely in an SDA.

There's still lots of educating that needs to go on but we need to make things much simpler, not more complicated.

I think an SDA is appropriate in some situations...for high net-worth individuals that can afford it. But, even many of them rely on their own advisors to help them make these types of decisions. I also agree that the distribution, loan and other rules of the plan will become more complicated and more difficult to monitor.

[Greg Judd]

The "more choices" trend has a life of its own, one fed by the same democratizing forces that drive our (apologies to any non-US participants) government. It'll continue, & it'll work more or less ok.

To Kirk's point about compliance issues; law generally follows behavior rather than leads--pols will follow the pack & come up with rules that basically fit the habits "we" want to have.

Kudos on another solid thread topic, tschenk.

[Jon Chambers]

My big problem with this idea is that investment management is like any other business. If you buy wholesale, you get a good deal. If you buy retail, you pay more. Plans that limit investment choice to just a few funds reap numerous benefits:

1) The funds can be screened by the sponsor and their advisor to ensure that they are reasonable and appropriate options.

2) The funds can be bought "wholesale" (i.e., using institutional class shares, or other low cost approach).

3) The funds can be designed to work with each other (i.e., they can be screened for excessive overlap to ensure that a participant using multiple funds is diversifying effectively).

A trend toward true participant selection eliminates all of these advantages. It also MAY expose the plan sponsor to greater fiduciary liability. That notwithstanding, the concept has enormous appeal to many sponsors that don't understand the underlying issues, so we may see it happen anyway.

[Guest tschenk]

1) Carol- Benna may sit on more boards than mPower according to http://www.401kwire.com/scripts/401kwire/p...?ArticleID=2725

2) You're right about participants wanting someone else to make decisions for them. Case in point is from today's BenefitsBuzz: http://www.ifebp.org/2000/10/01/20024/6251...RD.Missing.html

According to the article, the participants at NationsBank loved making investment decisions on their own so much that 74% opted into the DB plan when offered the choice!

3) Thanks for the kudos, Greg. The people that visit this site are the same ones who can become a spark to promote change in this industry. (Read: Help those who need help the most.)

The vocal (minority?) do-it-yourselfer participants in most plans are the ones demanding all the wonderful tools such as advice engines and SDA's. (And they are great tools!)

But what about all the others (majority?)who lack the knowledge, time, or desire to properly or efficiently manage their investments? In a world where everyone is obsessed with plan costs, has anyone done an analysis of the opportunity costs this group incurs from making poor investment decisions - each year?!? (Now, how "expensive" is that plan?) Gawd! please don't say they need MORE "education".

And it doesn't take a stretch of imagination to anticipate aggressive plaintiffs attorneys taking up their cause. Indeed, "law may follow behavior" as has we have seen with individual investors and securities laws over the past 25 years. Ask a compliance attorney at any major brokerage firm ..talk about a growth industry!

[Guest Nevin]

I continue to hear some promoting this "ultimate empowerment" of the participant...at the same time that participants seem to be desperately trying to avoid exactly this result. Some employers may initially find it more convenient to disengage from this responsibility, but they will do no one any favors other than the service providers who have been eyeing these assets for decades. Participants need - and want - more help, not necessarily more choices (with certain notable exceptions, such as law firms and doctors, who never seem to have enough opportunities to demonstrate their financial acumen).

[Guest Pete Swisher]

Three points have been raised: there will be enormous administrative hurdles; plan sponsors will lose some control at some risk to themselves; and it'll happen anyway. I agree with all three points, with this addition: SDA's will simply be one of many options--they will not take over the marketplace.

Regardless of new legislation, what liabilities will plan fiduciaries retain for these accounts? Seems like a big risk for minimal benefit to the employer.

[Guest RRS]

Progress is good. Choice is good to a point. However, more choice doesn't always mean better choices. If you don't believe me take your 4 year old to the "supermarket", put him or her in the cereal aisle and tell him to pick the "best cereal". A few problems: 1)What's a 4 year old's definition of "best" - healthy, more sugar, cool toy, etc... 2)What criteria will he use to make his decision - nutritional content, package graphics, cool toy, etc... 3)How many different brands of chocolate coated puffed rice are there - how many are made by the same manufacturer and packed in a private label box. How many have a cool toy? 4) What's his goal for the cereal - does he want to make sure that his cereal tastes better than anyone else's or does he just want to satisfy his hunger? Or maybe he just wants the toy!!!

One caveat, you can't help him decide (that would be a prohibited transaction), the store owner can't help him - "he doesn't get paid to do that". The child could pay someone to come with him to the store and help him with the decision but since he has limited funds and can read the latest cereal rankings himself or watch CNN (Cereal News Network) he'll probably make his own decision. Thank goodness he has 350 (excluding the 50 or so that don't even have a toy) different cereals to choose from! Most of which are at eye level!

Dalbar Financial did a study showing that (not considering reinvested dividends) self-managed investors (those who bought direct marketed mutual funds) earned (on average) 89% from 12/83 thru 9/95. Investors in the S&P 500 earned 429% (with reinvested dividends) for the same time period. Most would also agree that DB plans tend to do better than participant directed DC plans at a lower cost. And its not because they have more choice.

I think our creativity and use of technology may be overshadowing the fact that 401k (and other DC plans) are not as much about investing as they are about saving. If you believe in asset allocation, then your main goal as plan sponsor should be to offer a fund or two in each category that is a "reasonable" approximation for the asset class that it represents. A Large Cap Growth fund with a standard deviation of 40+ is not. It doesn't matter what the performance is. We should let Mom (plan sponsor) "monitor" the cereal brands we eat and let the "supermarket" owner (vendor) remove the "yucky" cereal from the shelf.

When we (as practitioners) have all of our plans at 100% participation and all of our participants saving the maximum allowable amount then we can worry about whether the earn 10% or 11% on their money!

P.S. If you go to grandma’s you can have cookies for breakfast!

[Guest tschenk]

"I think our creativity and use of technology may be overshadowing the fact that 401k (and other DC plans) are not as much about investing as they are about saving."

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Right on point RRS! The purpose of these plans is to get people to a dignified retirement - NOT trying to teach them to be disciplined, efficient investors. This may be a case of where technology has taken our eye off of the underlying problem (even though it's attempting a solution). Where in all of the hoopla is it asked, "Uh, what if our participants don't use it? ...or misuse it?"

It's interesting that you mentioned Dalbar's study (though there are more recent studies that illustrate this point). In a 9/98 Worth magazine article, Louis Harvey, President of Dalbar, put it most succinctly, "Indeed, the entire 401(k) ediface rests virtually by accident on the assumption that nearly anyone can and will learn to manage a retirement portfolio." This is a great article that I'm sure can be reached in Worth's archives.

[Guest FREE401k]

Wow - all this time we thought we were the only firm who felt this way. It is our opinion that the mutual fund industry has done a tremendous "push marketing" job on the American public. They are convincing everyone that if you aren't online, trading your stocks and actively managing your money, you are going to be left behind. After all, the guy washing the big boat in his driveway is doing it! The orange-haired punk coaching his boss on his first online trade is doing it! We better do it too! Yes, the stock market is great, but the fact remains that picking an investing philosophy, sticking to it, and periodically reviewing your investments (periodically meaning annually, not daily, or hourly!) is the best course. All of us in this business who know what is true and what is best for Plan participants MUST stand up to this flood.

What can we do? As paid professionals, it is our responsibility and duty to advise Plan sponsors of the truth. We must be constantly vigilant of our fiduciary obligation to run the Plan in the best interest of the majority of the participants. When a "noisy minority" clamors for something we know is bad in the long-run for most participants, we must share our convictions with them. When the media publishes articles that paint an incorrect picture, we should contact the publication and ask questions. We cannot just turn our heads and say "Oh well, look at the way things are going...what a shame."

And I did not know Ted Benna was on the board of mPower and others. Very interesting...

[david rigby]

This may not be on point, but it is relevant to the way our society views savings and qualified plans. I hope that our perspective of all savings vehicles can be flexible enough to recognize this. (Taken from an earlier discussion topic.)

People in their 20s do not need to be focusing primarily on saving for retirement. Most people have different needs at

different points in their lives, and saving is no exception to that rule. Sure, put some aside in your 20s, but don't put it all in a vehicle which is intended for retirement savings. Put some aside for the shorter term needs, especially saving for a house and college education for children. Yes, I know that there are vehicles that can be used for both, but what I am discussing primarily is the "mindset" of long-term vs. short-term.

Also, don't forget, that those in their 20s should put some aside to anticipate being a one-earner family with kids. It does not matter if you think that won't happen: odds are very high that it will happen, or that you will wish it could happen, at least temporarily or partially. The savings before kids merely gives you more options later.

[Guest Barry Max Levy]

The trust accounting fees for a plan with brokerage accounts for each participant could get extremely high. Also, how would source sub-accounts be maintained on a brokerage statement? - deferrals/match/PS/rollovers/loans/QNEC, etc. If sub-accounts are to be maintained by the TPA we would be going backwards to a hybrid of 1980's quarterly balance forward. With different vesting for different source there really isn't a vested daily val.