The “Father of 401(k)s,” whose brainchild revolutionized retirement planning, has another gleam in his eye. Ted Benna wants five changes made to 401(k) plans, which would mean more workers participating in these programs and employees saving more for retirement. What does he want to less of? High 401(k) fees, he tells ThinkAdvisor in an interview.
For a start, Benna, 76, is worked up about advisors’ fees for helping employers pick funds as if they’re executing original work. He says that with half a million plans in existence, they’re only repeating what’s been done before.
In 1979, Benna, then a benefits consultant, created the first 401(k). He used the IRS Tax Code Section 401(k) — which was to become effective on Jan. 1, 1980 — as the basis for redesigning a bank’s retirement program. He augmented the 401(k) provision with tax deferral for employees and matching contributions by the bank.
The client passed on his innovation, but Benna gained IRS approval, and the 401(k) plan became a whole new way to save for retirement. It, in turn, gave rise to the giant mutual fund industry, Benna notes in the interview.
To celebrate the birth of his creation four decades ago, Benna is releasing a new book, “401(k) – Forty Years Later” (Xulon Press) due out in paperback and e-book by Sept. 1.
The trailblazer’s take on 401(k) investments: Participants should be placed automatically into low-cost structured portfolios, but those who prefer making their own investing decisions should be free to do so.
In the interview, he stressed the critical importance of employing a smart strategy for retirement saving — think 401(k) plan — especially since another financial crisis “worse” than the 2008-2009 meltdown is looming, he predicts.
ThinkAdvisor recently interviewed Benna, on the phone from his office in north central Pennsylvania. He opined on advisors’ role in helping with 401(k)s and noted that small businesses can set up their own “Benna 401(k)s” using his guide offered on www.401kbenna.com. The anniversary book is Benna’s fourth. A previous one (written with Brenda Watson Newmann) was — can you guess? — “401(k)s for Dummies.”
Here are highlights from our interview:
THINKADVISOR: When I interviewed you in 2001, you wanted participants to have “unlimited choice and control” in choosing 401(k) investments. What are your thoughts 17 years later?
TED BENNA: At that time I was probably frustrated that participants weren’t being given enough opportunity and thinking, why shouldn’t they have as much flexibility as when they’re investing their own [private] retirement plan? Logically, that still makes sense.
What do you think now?
I’ve updated that thinking and defined the process to be something wiser. [In the interim] I’ve restructured companies’ plans so that participants are automatically put into structured investment portfolios using Vanguard Target Retirement Funds, which are extremely low cost. But for those employees who like to make their own decisions, there’s an open window to go out and do that without restrictions.
What do you think about 401(k) plan fees?
They’re unnecessarily expensive. When we started 401(k)s, the employer paid all the expenses except the investment costs. But in the early 1980s, the fees got bundled — all of them paid by participants. It got worse when investment advice, or managed accounts, [entered the picture], where another layer of fees was stirred into the mix and raised costs. Particularly in the smaller- plan market, 2% to 3-1/2% was not unusual.
What happened next?
As we began to add funds, wirehouses, insurance brokers and agents woke up to the fact that there was significant money in this field. So they morphed into investment advisors hired to help pick and monitor the funds.
Wasn’t that a positive?
The advisors are getting paid each time they go through the process with an employer to help pick funds as if they’re doing an original piece of work. There are more than half a million 401(k) plans, so that’s happened over half a million times. The fund menus aren’t that much different. But advisors are getting paid as if they’re doing an original piece of work. That’s just bizarre, extremely inefficient and much too expensive.
What should the advisor’s role be concerning 401(k)s?
First of all, they need to get away from asset-driven compensation and be paid a fee for service, the same as accountants or attorneys, who don’t get paid a percentage of corporate [client] assets. Their role should shift to helping people focus on how to succeed at retiring successfully, not on investment return. Building a smarter investment mix is pretty much of a commodity now. The focus should be on goals: “I want to retire successful. Help me do that.”
What’s one way the advisor can help?
Instead of teaching clients small-cap, large-cap, value vs. growth and that stuff, help participants find ways to save more to do a better job of financial management and focus on the stream of income they’ll [need] for their retirement.
What changes would you like to see regarding 401(k)s?
If I were National Retirement Guru with the power to do these things, No. 1 would be requiring all employers with a [certain] minimum number of employees to offer a payroll-deduction retirement program. That’s the most effective way for people to save.
What’s another change?