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?
All employers must use auto-enrollment for signing up employees. Mandatory auto-enrollment has been supported legislatively and has been growing in popularity. I would also have them do auto-escalation, once a year bumping up the amount [participants] save. But employees would have the opportunity to opt out of that.
Any other changes?
Too much of the savings escape — leakage — when people change jobs or when plans are terminated. So I would mandate that you have to keep [the savings] locked up for retirement either in the employee’s next 401(k), an IRA or other plan.
Any more changes?
When you retire, I would eliminate lump-sum distribution, other than maybe having access to 10% to pay off debts. Except for that, you’d have to take the money as a stream of income during your life expectancy [time].
What’s the likelihood that any of those changes would be made?
If someone were standing alone on this, it probably would never happen. It would happen only if someone introduced a piece of legislation that had a chance of passing through Congress and getting signed by the president. These aren’t really controversial things politically. Either side of the aisle could potentially see that they make sense.
You’ve said that 401(k)s “made” the mutual fund industry. Please elaborate.
Mutual funds were ideally suited to accept 401(k) moneys. At the time, they were the only instrument that you could buy or sell any business day of the month. The mutual fund business was mom-and-pop operations. And you had Vanguard and Fidelity, which were small, and a few other companies: Oppenheimer, Dreyfus, American Funds, Twentieth Century. There were a very limited number of funds, and the assets they had under management were pretty small. The 40l(k) plans clearly are what turned the companies into the giants they are today.
What’s behind your creating the 401(k) plan in 1979? You were with The Johnson Companies, a benefits consulting firm.
I was trying to help a bank client replace its cash bonus plan with tax-deferred profit-sharing plan in which employees wouldn’t have access to the money until they left the bank. In thinking about the bank’s goals, I was drawn back to 401(k), a section of the IRS code [that was to go into effect Jan. 1, 1980]. The part I brought was linking a matching employer contribution to that section and adding the idea of employees making pretax contributions out of their paychecks. There was no mention of either one in the 401(k) provision. So there wasn’t anything saying you could do those things — but there wasn’t anything saying you couldn’t.
Is the 401(k) plan threatened today by state plans, small-employer plans and federal thrift plans?
Potentially. I have both positive and negative views of what the states are doing to offer plans. The Oregon program they’re setting up is going to cost participants over 1%! I told the Pennsylvania Treasury office, when they asked me about a state plan, “Why would you invest the time and money to set up a program when small-business employers have the opportunity to establish a program that’s already out there and that will have a lower cost to participants?” Small employers just don’t know about attractive alternatives. The primary reason they don’t know is that the financial community won’t make a lot of money off them. Very simple.
What about federal thrift plans?
That’s one thing to consider — open to any worker or 401(k) participant. They would put the private sector in competition with the government.
In your upcoming book, you say that retirees who follow traditional investment advice assume too much risk. Please elaborate.
The significant problem with that type of portfolio is that if you get hit with another 2008 [financial crisis] and you’re in one of those funds designed for someone 65 years old, you’ll lose [a large part] of your nest egg the first year you’re retired. We don’t know when the next 2008 is going to be. So you can’t afford that risk. You can’t take that kind of hit without being in serious trouble. You need to really guard your nest egg during your retirement years.
Are you forecasting another 2008?
I think the next one will be worse. It’s a scary time. In this country, we’re in worse condition financially than we were pre-2008. In 2008, the states got a big bailout from the feds to help them work their way out of the crisis. Today, the federal government isn’t in a position to do that.
People talk about “the good old days” when everyone had a defined benefit pension. Your thoughts?
That’s one of the perceptions that’s just not correct: We need to revert back to the days when “everybody” got a pension. The idea that they were universal is a myth. The reality is that in “the good old days,” never more than 30% of private-sector employees were covered by a traditional pension.
When did you become interested in finance and investing?
I grew up on a Pennsylvania dairy farm, one of six kids. My father gave us a cow, and [my siblings and I] sold the milk it produced. So with that money I bought government bonds when I was very young. I’m still trying to keep that string going.
Have you ever tried to retire?
No. On a plane flight not long ago, the chatty lady beside me asked if I was retired. I started chuckling and said, “My business has been helping employers and employees retire, but I can’t quite picture total retirement for myself yet.”
— Check out Want to Be a 401(k) Superhero to Your Small-Business Clients? on ThinkAdvisor.