See this year's 401(k) Buyer's Guide.
One year ago, 401(k) plans were in crisis: account balances had plunged by double digits, employers were suspending matching contributions, and the volatility of the Dow made it uncertain as to whether the bottom had been reached.
The situation improved markedly in 2009. Fidelity Investments reports that participants in the millions of
401(k) accounts it administers enjoyed a 28% pop in 2009, a rate that beats the S&P 500 by 2%. (On the downside, the positive performance of 2009 simply put balances back at 2007 levels.)
But while plan participants managed to make up some lost ground last year, that bit of good news obscures a darker truth: the gains could be traced mostly to employees ignoring their accounts, as they have for the entire 30-year history of 401(k) plans.
Employers have long struggled to educate employees about how to actively manage their accounts for maximum gains. But research has shown that employees rarely do so, and have to be coaxed mightily into joining plans and choosing how to invest their money.
Ironically, their reluctance to manage their accounts seems to have served them well in the recent crisis. Fidelity reports that among the 11 million 401(k) plan participants in the plans it administrates, only 6.1% made any kind of asset exchange in the hairy last quarter of 2008, up a mere percentage point from the previous quarter, and only 11.3% took any action in all of 2009.
"What we're finding out about these plans is that they're ruled by inertia," says Bill McClain, a principal with Mercer's U.S. retirement, risk, and finance business. While that inertia likely saved many people who otherwise would have made bad moves, such as selling at the bottom of the market and buying back in as it climbed, it is hardly what most would consider a wise investment strategy.
This fresh reminder of how reluctant (or unable) most employees are to take charge of their financial futures is spurring many employers to reconsider the pension-fund model — if not in the actual funding of the benefit, at least in terms of making it dummyproof. Employer-sponsored
401(k) plans "are definitely moving toward a more paternalistic, 'we're going to do it for you' approach," says McClain. "We saw that with the movement to automatic deferral, and I think we'll continue to see that with automatic increases, and even automatic rebalances," with some companies going so far as to unilaterally move existing employees out of their own inappropriate investment choices into target-date funds (and letting them opt out, if they choose).
The new paternalism revisits steps that companies have taken in the past, but this time with valuable lessons learned about what type of help works for various populations — and what doesn't.
Tell Them What to Do?
While there have been plenty of efforts to educate employees with general aphorisms about long-term investing (nuggets like: Adjust your mix of equities and fixed income to your age, and diversify, but not too much!), it's clear that many employees need more than a group information session to actually become galvanized.
The range of advice products designed to give people specific recommendations about portfolios is broader than ever, covering everything from interactive computer programs to independent financial consultants who meet with employees in person. Fifty-one percent of employers now offer online investment guidance, 39% provide online advice, and 30% offer phone access to advisory services, according to a recent Hewitt survey. Another 34% plan to add some form of advice this year. (At most companies, the retirement plan or the company itself will pay for a third party to provide this advice, in order to avoid the legal burdens that befall company executives who give it.)
While this sort of help sounds good in theory, there are several obstacles. For one, the perpetual debate about what kinds of advice can be offered, and by whom, has yet to be resolved. Pending regulations at the Department of Labor are likely to redefine what is and isn't acceptable, and a bill in the House of Representatives (HR 2989) also seeks to put new boundaries around it. "Until the Department of Labor advice regulations are finalized — there's some justifiable angst about what is conflicted advice and what is not" — many employers are sitting tight, says Lori Lucas, defined contribution practice leader at Callan Associates, an investment consulting firm.
The low interest level shown by employees would, some experts suggest, make an already high cost (an independent adviser could cost even a small company $60,000 to $70,000 a year) seem that much more burdensome. The problem, again, is inertia. Lower-cost approaches may not fare much better. With interactive online services, for example, "it can take 20 or 30 minutes to go through all the questions, and you need all sorts of financial information to fill them out, so most people don't bother," says Robyn Credico, senior retirement consultant at Towers Watson. "And even if you do go through the questionnaire, few people actually act on the advice, and even fewer go back and do it again next year."
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