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As the stock market declines, taking many
a 401(k) balance with it, employers may take extra measures to ensure that employees
benefit fully from their plans.
Recent studies show that employers are likely
to do two things: step up their oversight of plans and, in response to employee needs,
help employees choose investments that are appropriate for their own situation. They would
do the latter by improving investment education, offering advice or offering new
investments that automatically allocate assets.
This will likely result in plans with better performing
investments that are more up to date and workers with more realistic expectations of what
their plan can provide in retirement.
Employer Monitoring
Under the Employee Retirement Income Security Act (ERISA),
employers are supposed to design and operate their 401(k) plans in the best interests of
their employees. This means the employer, also known as the plan sponsor, acts as a
fiduciary on behalf of the employee. Employers also choose the investment options.
Managing those investments can be one of the most
politically charged jobs a plan sponsor has. At the PSCA annual convention last September,
a number of benefits managers admitted that it's difficult for them to drop popular funds
that aren't performing. A common strategy is for employers to simply add a new fund for
that type of investment.
There are signs that employers, anticipating that the good
years would end, have stepped up their fiduciary efforts. These include:
- Drafting investment statements,
- Conducting annual investment reviews, and
- Scrutinizing brokerage window investment options.
In 2000, 60 percent of plans had an investment policy
statement, up 10 percentage points from 1999, Deloitte & Touche reported in its 2000 401(k)
Plan Benchmarking Survey. The investment policy statement spells out the criteria a
plan sponsor uses to pick funds to offer in a plan.
The fact that a plan has an investment policy should
comfort employees because it means sound reasoning is used to choose funds, Wray said.
Employers also need to monitor the funds. Deloitte &
Touche reported that 86 percent of employers review their investments at least once a
year, comparing funds' performance with preselected benchmarks and similar funds.
An annual review "means that someone is looking out
for them. ... Employees should expect an annual review," Wray said.
But, don't expect your employer to dump a fund just because
it doesn't show a profit for a year or two. If similar funds and benchmarks are showing
losses, a profit could be a sign of an inappropriate investment strategy. "The
fiduciary is not responsible for the investment performance of an asset" class, said
Martha Priddy Patterson, director, Human Capital Advisory Services with Deloitte &
Touche.
The fiduciary is responsible for making sure that the funds
offer participants a broad range of investment opportunities and that each invests as
advertised, Patterson said.
Too Much Choice?
Some employers are wary of offering too much choice in a
plan, such as self-directed brokerage windows. This investment option allows workers to
invest in almost any security available through a brokerage firm. But, this freedom gives
the investor more latitude to make costly mistakes.
Benefits-delivery firm Hewitt Associates reported in a 2000
survey that 45 percent of employers opposed adding this investment option. Their top
reason for declining to add this option: they worried that employees would make poor
investment choices. Meanwhile, the other 55 percent of employers surveyed currently offer,
will add or are considering adding this option.
Some plan sponsors have taken steps to try to limit
participant losses with this option. When the Southwest Airlines Pilot Association plan
introduced a brokerage window, it limited participants to investing no more than 25
percent of their holdings this way.
Useful Education
In a 401(k) plan, participants choose how to invest their
money and are responsible for their portfolio's performance.
But, the tools provided by employers are sometimes lacking.
Plan participants surveyed by the Boston Research Group in 2000 said their greatest
dissatisfaction was with education.
"Scores (for participant education) ... have been
dropping," said Warren Cormier, president and founder of Boston Research Group.
"In a good market, participants couldn't miss. Now, they feel that they weren't
prepared."
With plan sponsors and providers boosting the number of
investment options while cutting costs, education sometimes suffers. A leading complaint
is that employers use a one-size-fits-all approach, dumping reams of information on
participants with little explanation of how to get the most out of it. The result is that
"participants aren't equipped to make the kinds of decisions they need to make,"
Cormier said.
Plan sponsors can provide tools to help employees,
and experts expect them to start doing so. These include:
- Clearer, more informative statements,
- Education targeted to an employee's needs,
- Advice on how to invest, and
- New investment options that take care of allocation.
Sometimes the tool is relatively simple, such as providing
a personalized rate of return. A recent Watson Wyatt Worldwide study showed that 401(k)
participants who received a statement listing a rate of return for their individual
portfolio tended to boost their contributions by almost a full percent.
Demand for Advice
Another solution is offering education targeted to the
worker's investment sophistication. But, employees want more — solutions tailored
specifically to them. "People want the answer" of how to invest, said Cormier.
Busy employees don't always have time to study their plan
literature and learn how to apply the information to their situation. This is why there is
growing demand for advice, Cormier said. The Boston Research Group study found that 60
percent of employees want their employers to provide access to advice.
Some employers have shied away from providing advice
because they don't want to assume the additional fiduciary responsibility that comes with
it. ERISA only requires employers to provide a minimum of education, including the
operating expenses of each investment, prospectuses for each investment, information about
the value of investment shares, and a list of the assets held in each investment option.
But, advice is catching on and it's a service more and more
employers are likely to start offering, said Ted Benna, the creator of the first 401(k)
plan. "I think employers are increasingly going to be in the hot seat on this,"
especially if the market's stellar returns fail to materialize, Benna said.
Over the past few years, a number of independent
Internet-based advice providers have sprung up, and established fund and brokerage firms
have started offering advice.
"I think advice will be a key component of any plan
offering. Adoption will increase exponentially in the next few years," said Neal
Ringquist, senior vice president of business development with mPower Advisors, LLC, an
independent provider of online 401(k) advice. mPower is the publisher of this Web site.
One-stop Shopping?
Advice still requires a participant to actively manage his
or her retirement funds, though. An alternative for people who lack the time, interest or
skills to do this would be a single-answer investment option, said PSCA's Wray. This could
be a combination lifestyle and life cycle fund tailored to the participant's age and risk
tolerance. Or, employers might hire fund managers to oversee a broadly diversified fund
specifically for the company's plan. |
