Human Capital & Careers

Look Out! Here Come the Day Traders

CFOs need to stay on top of the expenses and liabilities of self-directed, online brokerage accounts.
David KatzMarch 16, 2001

Employers will soon be able offer more and more 401(k) participants the ability to trade in individual stocks online. But liabilities loom for plan sponsors as they welcome the onslaught of the new day traders.

On March 13, The Principal Financial Group, a leading 401(k) services provider, and Ameritrade Holding Corp., an online brokerage firm, announced a joint venture to offer self-directed, brokerage-account services to 1.4 million retirement plan members of The Principal.

The Principal, which claims 7,000 plan sponsors among its 401(k) clients, already offers self-directed accounts. But the new program, slated for an April launch, will enable plan members to invest their retirement assets in individual stocks and mutual funds via an integrated, online platform.

The Principal has at least $37.4 billion 401(k) assets under management and keeps the records of 2 million plan participants, according to CFO magazine’s 2000 Buyer’s Guide of 401(k) Providers.

The Principal deal follows a similar Ameritrade joint venture with Persumma Financial, an online 401(k) provider and member of the MassMutual Financial Group, announced February 28. That deal would also enable plan participants to self-direct their investments in individual securities online.

Ironically, these deals are being struck in the midst of a falling stock market with an as-yet-to-be-determined bottom. In such an environment, the ability to trade in individual stocks may not seem such a boon to participants as it may have in the boom market.

Should bad results persist for the growing number of self-directed 401 (k)portfolios, participants might start blaming employers for offering the accounts. Depending on the duration of the downturn, defined- contribution plans in general might become the target of critics claiming the plans impoverish retirees.

Worse, at individual companies offering the accounts, what has seemed a good tool for retaining employees might become a reason to leave a company. The accounts could also become a focus for employee lawsuits against employers alleging a failure to warn about investment risks.

Self-directed 401(k) brokerage accounts could also pit participants against participants, with employers ending up as the target for class- action suits, Joe Hessenthaler, a principal in Towers Perrin’s Philadelphia offices, tells

If, for instance, a plan ends up paying $800,000 out of the $1 million it’s charged in administrative costs for a relatively small number of self-directed accounts, the 401(k) participants who don’t use the accounts could get mad enough to sue the employer, the consultant says.

“Participants are going to pay more attention to the expenses” of plans that offer self-directed stock investing, he predicts. “CFOs need to be mindful of the expense issue and the liability.”

Self-directed stock accounts will also place a greater burden on employers to keep an eye on the investment choices offered in their 401 (k) plans. “The problem with many employers is that they don’t do the due-diligence,” Hessenthaler says. “How do you know three years from now if [the investment vehicle is] still the right choice?”