Send in the Eggheads

Last winter, as Magnetek Inc. CFO David Reiland was reviewing the structure of the 401(k) program at the Los Angeles-based maker of power controls, he found himself drawn to a plan that would give employees some extraordinary help with their retirement investing. Under the program, created by consultancy ProManage Inc., professional advisers actually select 401(k) investment allocations according to the needs of individual participants.

Magnetek's old plan offered some "lifestyle" fund selections, putting groups of employees into investment strategies to meet their particular needs. But the ProManage approach sounded "much more tailored," says Reiland, "so we thought it was a good idea."

While most companies make some effort to educate employees on the basics of 401(k) investing, many workers fail to make choices best-suited to their situations "We have found that a good number of folks in these plans don't have the knowledge or the desire to manage their assets," explains ProManage CEO Carl Londe. So his company, part of a small but growing plan-management industry, seeks to design portfolios for individual members using funds in a plan, then rebalance them annually based on age, expected pension size, Social Security benefits, and current account balance. That makes more sense for participants, he says, than letting investments linger in a stable value fund, or thrusting them into the choice of the moment. Participants "like having choice," Londe says with a laugh. "They just don't want to exercise it."

How have Magnetek's 600 or so employees reacted to the availability of a managed plan, which costs each user about 0.035 percent of his or her assets annually? Nearly 80 percent have stuck with it since its inception as the company's "default" offering last January. Reiland says that the low attrition rate, and a general lack of objection overall, are proof that it is a good approach. "I think people are happy to hand off the responsibility of managing their money to someone who is using some science to do it," he says.

A Do-Nothing Norm
Indeed, there is little evidence that investment education, or the availability of professional advice, prompts employees to put their 401(k)s on a sensible track. So some experts see services like ProManage sometimes making more sense than self-directed plans.

"They are a very, very viable alternative," says Ed Ferrigno, vice president of the Chicago-based Profit Sharing/401(k) Council of America. Not that they are a popular alternative yet — 97 percent of plans still leave investment choices to participants — but Ferrigno says many companies are now exploring options to relieve participants of those choices. The new approach, he says, includes adding more lifestyle funds that balance assets based on targeted retirement dates. In all of these efforts, "what we're really looking at is a way to make a plan where good things happen if the employee does nothing."

Doing nothing is, of course, the norm for most 401(k) investors. On any given day, the percentage of 401(k) assets transferred averages less than 1 percent of funds, according to Hewitt Associates. The only time activity has risen above 5 percent in the past five years was on September 17, 2001, following the reopening of the stock markets after the September 11 terrorist attacks. While such sluggishness may incidentally reinforce the buy-and-hold strategy recommended by many experts, unfortunately participants don't first optimize their portfolios to produce appropriate retirement savings. So bad early decisions get compounded.

Poor savings strategies meant that "even at the height of the stock market, the average household couldn't afford [to invest] 100 percent of what it would need for retirement," says Economic Policy Institute economist Christian Weller. Today, employees that do rebalance are likely to aim for low-yielding, conservative funds — which are unlikely to help their households make up much of the 20 percent of total wealth lost during 2000 and 2001. That skittishness, combined with poor market performance, pushed the allocation of 401(k) assets in equities to a record low of 57.2 percent in September, according to Hewitt, down from nearly 75 percent in late 2000.

A "Big-Picture Confidence Problem"
Helping employees make 401(k) investment decisions has always been a tricky task because of federal Employee Retirement Income Security Act (ERISA) laws, which seek to prevent conflicts of interest by banning fiduciaries and providers from offering any advice on the plans. Valmont Industries CFO Terry McClain, for example, says he has "tried to address the big-picture confidence problem," telling the 3,700 U.S. employees of the Omaha-based maker of poles and towers that the presence of accounting scandals at a small number of firms doesn't mean all stocks are tainted. Still, as he sees employees move their savings to "investments they perceive to be safe, but might not be good for them long-term," he can do little to stop them. "You have to be very, very careful," he says.

Investment advice has been a little easier to come by lately, though, thanks to a Labor Department advisory letter last December that allows plan providers to offer advice based on third-party analyses. The ruling likely will protect plan sponsors if disgruntled employees later try to sue them for providing bad advice. And those protections could become stronger if a House-approved bill, sponsored by Rep. John Boehner (R-Ohio) were to pass Congress. (The bill would formally absolve employers from liability attached to investment advice as long as they could demonstrate a prudent selection process.)

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