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Security Blanket

Management options for 401(k) investments protect both participants and sponsors.
Roy Harris, CFO Magazine
May 1, 2003

(Editor's note: Be sure to check out our interactive
401(k) Buyer's Guide.)

The effect of the bear market on 401(k) participants seems clear, at least to plan providers. Employees who once demanded numerous investment alternatives and "advice" services are less sanguine about making their own decisions these days. Even if allocation choices are guided, the onus is still on participants to rebalance their plans, then worry whether a poor choice may be draining their precious retirement pools. Today, more employees want experts to make the investment decisions for them.

In recent years, the most popular form for professionally managed programs has been the so-called life-stage or lifestyle account, in which member profiles generally determine which one of a preselected group of asset mixes will be applied. Of course, the proximity of retirement is the profile's central characteristic. Such a design reduces employee decision-making to one big choice: whether to participate. But after that, changing allocations is still left to the participant.

Interest is growing, though, in 401(k) approaches that may cost a bit more in fees, but that offer employees the assurance that professional investment managers are making regular investment decisions for them, tailored to their specific needs and reflecting changing market conditions. Fidelity Investments calls its Fidelity Retirement Plan Manager program part of a "discretionary management services" movement. Among a host of other new entries in the field, Morningstar has Morningstar Managed Retirement Portfolios and Putnam Investments offers Retirement Choice Portfolios. Firms with somewhat longer track records in providing this type of plan include 401(k) Toolbox, Ibbotson Associates, ProManage, and Scarborough Retirement Services.

"This is an area where there is a lot of creativity right now," says David Wray, president of the Profit Sharing/401(k) Council of America, an organization that considers both life-stage and more-service-intensive options to be in the same category: professionally managed plans. The Profit Sharing Council's annual surveys don't yet focus on plans with management-service levels beyond the basic life-stage plans, but Wray says he expects the current survey to show that as many as 40 percent of plans now allow employees to delegate investment decisions in some fashion.

Kathryn Hopkins, executive vice president of Fidelity Institutional Retirement Services Co., expects interest in discretionary services to be especially high among current life-stage participants, "who may have started out with the appropriate mix, but now find themselves completely out of balance through no fault of their own."

The recent interest among providers and sponsors also reflects diminishing concerns about potential liability for retirement-fund losses. "Clearly, the regulatory environment is now favorable for services like this," says John Rekenthaler, president of the Morningstar Associates LLC investment adviser unit. He cites a 2001 Department of Labor ruling that "flashed the green light" for companies to offer such plans, where "before it was an unmarked intersection."

Maxtor Corp., one of the first companies to introduce Fidelity's Plan Manager, makes it available to its 3,200 employees. They will pay for the additional services through a net advisory fee of about 0.35 percent to 0.60 percent, depending on individual balance size.

"There will be a learning curve, but I think a service like this will be very useful," says Richard Bolf, vice president for worldwide compensation and benefits for the Milpitas, California-based disk-drive maker. Of course, it remains to be seen what the employee reaction will be the first time a professionally managed plan fails to outperform the Standard & Poor's index.

"We're at the front of the trend, which is exciting," says Bolf. "A lot of companies won't do something like this unless the herd is moving in that direction."

As the bulls refuse to run, however, companies may stampede toward this new option.




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