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 less of? High 401(k) fees.
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 deferrals for employees and matching contributions by the bank.
To celebrate the birth of his creation four decades ago, Benna releases a new book, “401(k) – Forty Years Later” (Xulon Press), this month.
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.
Here are excerpts of the interview:
Investment Advisor: 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.
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? 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.” [So] 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? 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.