Saturday, November 10, 2007

The On Your Own-ership Society


Last week, as I was surfing the Web, I stumbled across an article titled “Time for Employers to Cut Cord to 401(k) Plans.” These days, I wouldn’t be surprised to see that kind of premise from a pro-business periodical (see “Why Knots”)—but the premise here was quite different. The article’s author—Bloomberg’s John Wasik—wasn’t suggesting that employers should get out of the 401(k) plan business because it made good business sense for them, but rather that “employees can benefit from having 401(k)-style plans cleft from their employers because the programs would cease to be a black box of excessive middlemen and management expenses.”

The article points to the recent round of hearings on the issue in Congress, “several government reports,” and a recent survey by AARP as proof that employers are not fully disclosing and reducing fees in these retirement programs. And thus, Wasik argues, “[G]iving you more control over your 401(k) will also give you the chance to find the best providers of the most diversified funds.” Wasik maintains that, by allowing individuals to do their own shopping for the best deals, a “competitive national market” would emerge. “Middlemen would get the boot and employees could improve their total returns,” he says.

Now, I’m a free-market libertarian from way back—and I’m leery of current trends that, IMHO, seem to disengage participants from the business of paying attention to these investment accounts. But as I told Wasik in a follow-up e-mail, “No offense, John—but are you nuts?”

I’ll concede that there are almost certainly situations out there where participants are being ill-served by the fees they are paying for their retirement plans, though I personally happen to think those situations are not as pervasive—or as egregious—as some would have us believe (it wouldn’t hurt to have more disclosure to be sure of that, however). I will also concede that many (most?) participants don’t know what they are paying for their retirement programs—though I think that most could get to a good approximation of that number with a modest amount of help.

However, it seems to me that getting the employer “out” of the 401(k) would have several immediate—and hugely detrimental—impacts to participants. First and foremost, our purported ability to find a better deal on our own notwithstanding (setting aside for a moment the reality that some significant number of participants don’t even want to take the time to fill out an enrollment form; see “For the People, By the People” ), how am I going to be able to find a better deal with my individual 401(k) balance than my employer can with the aggregated balances of me and all my co-workers? Even if some highly compensated workers managed to negotiate a special arrangement, do we really think that that the average participant could—or would?

Second, once employers become mere conduits for payroll deductions, workplace education on such matters as the importance of saving and investment will become a thing of the past—after all, participants will now get that from the provider they found on their own. Enrollment meetings? No need for that, since your 401(k) is a do-it-yourself option. And, IMHO, once we’re “on our own,” it won’t be long before that employer match will fade away (in Wasik’s defense, he doesn’t see the loss of the match as a consequence of his proposal—but I do). The model for all the above, IMHO, can be found in much of the current non-ERISA 403(b) space: the match, the lack of employer involvement, the low participation rate(s), the fees….

But the thing we would lose most with an employer-lite 401(k), IMHO, is the oversight of a trusted fiduciary. Granted, many employers don’t fully understand that role or the responsibility—too many don’t have the expertise, and far too many are willing to place those decisions in the hands of providers and advisers undeserving of that trust.

But many more are working hard every day to see that these programs are well-administered, reasonable in price and service, funded and supported in the workplace—and in the process, making a difference in helping ensure a more satisfying retirement for us all.

IMHO, it’s a contribution we can’t afford to be without.

- Nevin E. Adams, JD

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