401(k) Products Should Get Ready For More Changes
Products and services available to 401(k) participants today have evolved during the past 20 years, largely through market pressure–from the participants themselves.
The changes include: expanded investment options (to eight or more, up from two); increased access to information; availability of transaction capability on a 24/7/365 basis; and increased education and investment advice (the latest product enhancement).
Going forward, the pace of change will not slow down, and it will continue to be influenced largely by participants. In short, 401(k) marketers need to start gearing up for more change.
People who disagree with that prediction say most participants are content with their 401(k) plans as they are now. But, while its true that at least 80% of participants are either content or indifferent about their plans, that is only part of the story.
Change in this equity arena has historically been driven by the more knowledgeable, proactive participants, not those who are content with what they have.
Consider why the industry moved from offering two funds to offering eight or more. That didnt happen because the vast majority of participants wanted additional options. It happened because participants who wanted more funds successfully pushed the market in that direction.
That is the pattern that will continue in the future, hence making for even more change. Following is a look at what some of the coming issues might entail, plus a review of possible solutions.
Choice and Control: People who have access to unlimited investment alternatives through their IRA and other personal investments will want the same flexibility with their 401(k) plans.
After all, someone who can select from thousands of alternatives when investing only a couple of thousand dollars outside the 401(k) has difficulty understanding why he/she is limited to only 10 alternatives when investing a much larger sum inside it.
As for the issue of control, participant demand for greater control over their 401(k) investments will rise. For several years now, employers, service providers and the media have told employees that planning for retirement is the employee’s responsibility. This includes responsibility for planning how to invest retirement savings.
Therefore, when employees receive notice from their employer, to the effect that their 401(k) money is being moved from one set of funds to another, they are initially surprised and then annoyed. It suggests to them that they don’t really have the control they thought they had.
Participants who have received such announcements have frequently asked me whether the employer can legally force them to move their money from one set of funds to another. The answer is yes.
However, as we have seen, such forced moves are inconsistent with what employees have been told about being in control of their retirement planning and investing. This inconsistency is becoming increasing uncomfortable to both employers and employees. In some instances, the practice has led to lawsuits.
Therefore, the pressure for change in this area is rising.
Change of Employer’s Role: Employers today assume the responsibility and the liability for how employees invest their money when they pick the investment choices that will be offered to employees. This structure, in my view, puts employers in a high-risk business where they can never win, but they can lose big-time.
Why should employers be responsible and liable for how employees invest their money?
Selecting investment options, monitoring performance, and replacing managers is time consuming and rather expensive. No matter how much skill is employed, there always are participants who are unhappy because they want something different than what is available.
During industry conferences, when I have made the comment that employers are in a no-win situation in this area, most of the attendees responsible for overseeing their employer’s plan shake their heads in agreement.
Location: Currently, participants make what they intend to be long-term investment decisions when they are working at one employer. Then, these plans are disrupted when their employment changes; when they change jobs, retire, or their employer is sold; or when their employer changes service providers. For todays mobile and several-career workforce, that makes it difficult to have continuity for a lifetime.
The Solutions: Employers should stop being investment gatekeepers.
Employees should have the same flexibility when they are investing their 401(k) money that they have when investing any other money. They should also never be forced to move their money from one set of investments to another.
Furthermore, participants should be able to establish investment relationships that continue for a lifetime, regardless of where they are employed or even whether they are employed.
And finally, employers should stop attempting to pick the 10 “right” funds for their employees.
, often called “the father of the 401(k),” is principal of The 401(k) Association, Bellefonte, Pa. You can e-mail him at: firstname.lastname@example.org.
Reproduced from National Underwriter Life & Health/Financial Services Edition, August 20, 2001. Copyright 2001 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.