VideoSouthwest Airlines Co. CEO Herb Kelleher is renowned for his iconoclastic approach to management: He's been known to ask prospective pilots to drop their pants during job interviews, to test their sense of humor. But his company takes employee relations very seriously. In fact, the airline's employees are viewed as its "first customers." So when the company's pilots heard about some high-flying stocks and wanted a piece of the action, they got it.
In July, the Southwest Airlines Pilots' Retirement Savings Plan began offering its participants the Schwab Personal Choice Retirement Account, a self-directed brokerage (SDB) account, as a new investment choice. Now pilots can invest a portion of their 401(k) plan account balance in individual stocks and bonds as well as in more than 1,900 mutual funds. "We ran surveys, and that's what most people wanted," says Richard Doherty, director of member benefits for the Southwest Airlines Pilots' Association, the retirement savings plan's administrator. "They weren't satisfied with the 10 core funds we had." So far, 550 of about 3,500 Southwest pilots have taken advantage of the brokerage option, and Doherty expects that 25 percent of the pilot workforce will sign up by year's end.
In large part because today's business environment is marked by a wide-ranging skills shortage--the "war on talent," in managementspeak hyperbole--a growing number of companies are willing to listen when employees ask for an SDB option as part of their 401(k) accounts. According to a study conducted earlier this year by Cerulli Associates Inc., a Boston-based financial research and consulting firm, 14 percent of the 250 companies surveyed offer an SDB option, up from 8 percent in 1999 and 5 percent in 1998. Another 9 percent of respondents said they were planning to add the feature this year.
The growing interest in SDB accounts reflects a philosophical shift away from what's viewed as corporate paternalism; in essence, the same impulse that led to the creation of 401(k)s to begin with reaches a new level with SDB accounts. For more than a decade, companies have been abandoning defined-benefit plans in favor of defined-contribution plans, which require participating employees to make their own investment decisions. Arguably, when an employer transfers the responsibility for retirement saving to its employees, it is duty-bound to provide them with an optimal range of choices. "Self-directed brokerage is the next logical progression in the empowerment of participants," says Walt Bettinger, president of the Retirement Plan Services Enterprise division at Charles Schwab & Co. "It offers them broader choice. If we ask participants to be responsible for their investments, it's only fair to give them all the necessary tools to do so."
But not everyone favors the trend toward unlimited investment choice and unmitigated individual responsibility for retirement savings. Christopher Hobbs, CFO at Xuma Inc., a San Franciscobased E-business infrastructure and managed services provider, advises against including an SDB option in 401(k) plans. "We've looked at that issue," he says, "and I specifically declined it for the simple reason that, philosophically, you shouldn't day-trade your retirement account. This is retirement money, and it should be managed professionally." Hobbs explains that Xuma employees can achieve potentially high returns within the company 401(k) menu, which includes a wide array of mutual funds. "If they want to be aggressive, we offer a solid selection of emerging-growth funds," he says. "Besides, our employees are young folks, and I don't want them looking at tickers all day."
The most common business rationale for introducing a brokerage option--to attract and retain good employees--doesn't fly with Hobbs, either. "In a start-up market, no employee is going to leave over a 401(k). It's a sweetener, not a hook. I don't know of anyone in our sector who's left anyplace or accepted a job offer because of the investment options available to [him or her]." Hobbs believes that what really attracts talent to Xuma is the fact that his company is doing "exciting things," not that it offers access to exciting stocks through an SDB account.
Hobbs has the allure of a cutting-edge company on his side, of course. Yet many experts agree with him. They caution that with more investment choices come some potential pitfalls: the risk of day-trading retirement money and the risk of inappropriate investment selection by employees faced with too many options. Another area of concern is the employer's fiduciary responsibility to select and monitor appropriate investments for the plan. The lack of Department of Labor (DoL) guidance and Employee Retirement Income Security Act (ERISA) case law regarding the maintenance of SDB accounts makes many plan sponsors nervous about offering them.
But the case for prudence is often in conflict with the desire to please employees. "Plan sponsors are generally reacting to a very vocal minority who are the highest-paid employees," says Michael McCarthy, a Hewitt Associates 401(k) consultant. "Self-directed brokerage is definitely something they are demanding, but for the plan sponsors, there's a steep learning curve." Experts recommend that companies look at their employee population and determine for whom SDB accounts might be appropriate and how they would fit with the overall menu of choices available.
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