If Ted Benna, the originator of the concept of 401(k)'s, has his way, 401(k)'s could become completely flexible, portable, and participant-directed within the next ten years.
Benna, president of the 401(k) Association, an advocacy organization in Bellefonte, Pa., is discussing with the U.S. Departments of Labor and the Treasury transferring 401(k) sponsorship from employers to independent, third-party investment advisory firms. In doing so, 401(k) plan participants would be able to choose whatever type of investment they wanted - including individual stocks - and carry those investments with them no matter where they worked, or did not work.
Although he is only in initial discussions with the government agencies, Benna is already confident that participant-driven, independently-overseen 401(k)'s will be endorsed by the government within the next ten years. This new type of 401(k) would function much like an IRA, Benna said.
There could be many benefits to fund companies, he said. Accounts directed by participants rather than by plan sponsors would dramatically change a fund company's relationship with 401(k) investors, Benna said. Fund companies would prefer to communicate with investors directly through an independent investment advisory firm, rather than through a plan sponsor, Benna said.
This would give fund companies the chance to retain participants' accounts as the participants moved from job to job, Benna said. Attrition of assets due to job changes has a tremendous effect on fund companies each year, he said.
Industry studies have shown that fund companies lose billions of dollars every year because of 401(k) rollovers. Fund companies lose assets under management 94 percent of the time when plan participants switch jobs or retire, according to Hewitt Associates of Lincolnshire, Ill. (MFMN 10/4/99)
Totally flexible 401(k)'s that allow investors to place their money wherever they want could also enable smaller fund companies to land some of this business, Benna said.
It would also be a relief to employers because it would absolve them of fiduciary responsibility, Benna said. Investors would also be able to obtain solid investment advice, he said.
However, totally flexible 401(k)'s that would allow investors to buy individual stocks could drain some mutual fund assets from 401(k)'s, Benna said.
Also, some of the large fund complexes that have established relationships with large employer plan sponsors might be reluctant to lose those wholesale-type relationships which they have worked hard to obtain, Benna said. Working with independent investment advisors and individual investors would also be an opportunity, but an opportunity of a different kind, Benna said. It would mean more one-on-one sales strategies, he said.
"There is no question portable, self-directed 401(k)'s are going to happen," Benna said. "And they are going to happen more quickly than I originally thought, because the employer and the employee marketplace is asking for it. Beginning in the next year or two, the momentum will begin. Once it picks up, it will continue. I predict it will become a reality within ten years.
"401(k)'s work well. But they could do better. That is what I am focusing on now that we are [two years] past the 20th anniversary of the 401(k)."
Dallas Salisbury, president and chief executive of the Employee Benefit Research Institute of Washington, was not as optimistic about the adoption of this new version of 401(k)'s. Several members of Congress have introduced similar proposals over the years, which were not well received, Salisbury said.
Benna said that change is often difficult, including for trade organizations like EBRI, which is supported by plan sponsors.
David Wray, president of the Profit Sharing/401(k) Council of America of Chicago, said his organization would support self-directed, fully portable 401(k)'s sponsored by independent investment advisers as long as the system allowed employers to continue to make matching contributions. Such a 401(k) could have its place among established, employer-sponsored plans, Wray said.