Have 401(k)s Failed Investors?

A panel of experts asked whether 401(k)s were a “failed experiment” at the 2013 NAPA/ASPPA 401(k) Summit in Las Vegas on Sunday. Despite a few disagreements on some of the particulars, the panel was largely in agreement: No, 401(k)s haven’t failed, but there’s always room for improvement.

Brian Graff (left), CEO and executive director of the American Society of Pension Professionals and Actuaries, led the panel in a discussion of what 401(k)s have done for participants and what could still be improved upon.

Kevin Crain, head of institutional retirement and benefit services for Merrill Lynch, told attendees that 401(k) plans started as a “great democracy” where the responsibility for decision making fell on individuals. Now, he said, we’ve moved to a “democratic paternalism” where plan sponsors are working to help people get more involved through built-in features like automatic enrollment, but as investors become more astute they can move away from the paternalistic aspects and take more control of their plans.

Karen Friedman, executive vice president of the Pension Rights Center, acknowledged that “there’s no question that everyone cares [about clients’ retirement] and wants people to save,” but noted 401(k)s had several weaknesses: they are designed as supplemental income, investment decisions and risk fall on individuals, and millions of people don’t have access.

Where people do have access, 401(k)s are useful, she said. People who can afford to make contributions can benefit —“if they can make the money last.” Payroll deductions make contributing easier for participants, and plans are easy to understand.

“We’d like to see money paid out over participants’ lifetimes and encourage annuitization,” she said. Unfortunately, many participants have to “overcome psychological barriers. When people see how much money they have, they don’t want to hand it over.”

Judy Miller, ASPPA chief of actuarial issues and director of retirement policy, agreed that automatic payroll deductions made saving easier for participants, and added that outcomes were even better when combined with automatic enrollment. She pointed to incentives like employer matches and tax deductions that help keep people in plans. Most of all, as a “free agent nation” where people change jobs frequently, 401(k)s’ portability allows participants to accumulate a good benefit over their lifetimes.

Graff raised fees and fee disclosures as a major issue in 401(k)s today. “There’s no appreciation among policymakers for how efficient the industry’s fee structure is,” he said. “We’re becoming exceedingly more efficient, but we’re not doing a good job talking about that success.”

Crain noted that larger plans can certainly take advantage of economies of scale for more participants, which keep fees low for both participants and plan sponsors. “There are two consumers” of 401(k) plans, he said: the participant and the plan sponsor. For participants, effective fee disclosure is “not there yet.” Fee disclosure for plan sponsors is “far clearer and they’ve been invoking their buying power quite effectively.”

“We look forward to seeing how consumers react to fee disclosure,” Friedman said.