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As the stock
market declines, taking many a 401k 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 401k 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 401k 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 pre-selected 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 401k 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 401k 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 401k 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 401k 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. 
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