NEW YORK - The adequacy of defined contribution plans as a vehicle for retirement savings was a key issue at Pensions & Investments' Fourth Annual Defined Contribution Conference.
Meanwhile, Commissioner Richard Y. Roberts confirmed at the conference the Securities and Exchange Commission is considering requiring or suggesting simplified mutual fund prospectuses be sent to all defined contribution plan participants.
The question of adequate retirement income was the subject of a Socratic dialogue led by Charles Ogletree, law professor at Harvard University.
Mary Rudie Barneby, president of Regis Retirement Plan Services Inc., expressed concern over an impending retirement crisis and what would happen to workers who found themselves without the assets to finance retirement goals.
Robert Hunkeler, manager of fund management at Sandoz Corp., questioned whether having to work beyond "normal" retirement age constituted a "crisis." And J. Perry Conley, director of deferred benefits for The Kroger Co., revealed that many Kroger employees are more than 70 years old, perhaps early riders of a wave of Americans who will not retire with adequate replacement income.
The loan feature of many 401(k)s was endorsed strongly by David G. Ball, chairman of the Washington office of the law firm Williams, Mullen, Christian and Dobbins. He previously served as assistant secretary of the Department of Labor. Restrictions on or elimination of loan provisions would hurt plan participation rates, he said.
Mr. Conley, however, said Kroger discourages loans by imposing hefty loan processing fees.
Many panelists in the dialogue were concerned employees don't take advantage of the "portability" of their defined contribution plan assets by rolling them over into a new employer's plan or into an individual retirement account upon termination.
Ted Benna, president of the 401(k) Association, strongly urged Congress to approve mandatory IRA rollovers to prevent leakage from the retirement system.
Mr. Ball said Labor Department statistics suggest that more than two-thirds of the assets distributed from 401(k) plans are rolled over into a suitable retirement vehicle and that those who do take a distribution only remove several thousand dollars.
Other panelists noted the larger the size of an account at termination, the more likely a participant is to roll over the full amount.
Gap in ERISA coverage
The SEC's Mr. Roberts said investment education geared specifically for retirement plan participants is one of the "gaps" in the Employee Retirement Income Security Act. An interpretive bulletin - to be issued this spring jointly by the SEC and the Labor Department - will clarify what constitutes investment advice vs. investment education.
He applauded the voluntary efforts sponsors have made to educate participants about their 401(k) investment options. But he added: "I think a defined contribution participant is as entitled to adequate investment information as any other investor. Deciding where to invest assets within a retirement plan is probably the most important financial decision the participant will ever have to make."
Mr. Roberts said while the SEC probably has the authority to require that full mutual fund prospectuses be sent to each plan participant, the agency may take a softer stance and make the distribution of such information voluntary but strongly recommended.
Given the complexity of most mutual fund prospectuses, the SEC is considering whether a shorter version might be more accessible and understandable for participants. The short form would need to at least outline the fund's investment objectives, give a sense of the portfolio's underlying holdings, describe the relative risk level of the fund, provide historical performance information and compare the fund's performance with other peer funds and other asset classes.
Future of 401(k)s
In his keynote speech, Bob Wuelfing, president of Access Research Inc., Windsor, Conn., predicted defined contribution assets will exceed defined benefit assets by the end of the decade.
The marketplace, he said, has nearly doubled in 10 years, swelling to 240,000 defined contribution plans in 1994 from 135,000 plans in 1984.
More than 90,000 new defined contribution plans probably will be established by 1999, he said. Most, he said, will be established by small companies and will use bundled services from a single provider or alliance of providers.
In the last 24 months, said Mr. Wuelfing, bundled service arrangements were selected by 70% of new plans with fewer than 100 employees and 65% to 70% of companies with 100 to 500 participants.
Some of Access' research showed good news about participant behavior. Participation rates probably will increase 4% to 5% annually for the foreseeable future. Also, average account balances should remain stable. More than 50% of all 401(k) plans have an average account balance of at least $50,000, and 6% to 7% have more than $100,000.
Plan participants are doing a fairly good job of investing their assets, according to Access' research. The firm estimates the difference in performance between a typical defined benefit plan and a typical defined contribution plan is only about 1.5% or $8,000 over a 15-year period.
Mr. Wuelfing said because the market will be saturated by the turn of the century, consolidation among vendors is coming, as is concentration of business among the top firms.
By 1999, he said, the top 15 service providers will control up to 85% of the defined contribution plan market; their market share now is 45%.
Investment education a priority
Many plan sponsors speaking at the conference stressed the need for repeating to participants basic investment and finance information in a multimedia format.
Don Butt, manager-trust investments of U S WEST Inc., said his company consciously repeats the definitions of investment classes, the need for portfolio diversification and the power of early savings about every 18 months. U S WEST uses print, computer, audio and video formats in groups and individual meetings.
Some employers, such as Times Mirror Corp., try to give employees what they request. Times Mirror executives will use employee survey results to make plan design changes next year, said Mark L. Schwanbeck, assistant treasurer. He added the company may make employees share some of the cost for services they demand, such as daily valuation.
Expanding the range of options and plan features to meet diversification demands of employee also was a point made by plan executives.
Raymond Kanner, senior investment manager-retirement funds at IBM Corp., said his company made plan participation more attractive by increasing the company match and the maximum amount of salary an employee may defer. Based on the results of an employee survey last year, IBM may move to daily valuation, alter its already well-received quarterly newsletter and add emerging markets exposure later this year through its existing international options, he said.
Times Mirror probably will add separate account management for cost savings next year from multiple managers in addition to the mutual funds now offered.
Ruth Hughes-Guden, managing director at RogersCasey, Darien, Conn., noted the strong gains made last year by so-called life cycle asset allocation funds. Janet K. Trombley, director-benefit plans investments at Campbell Soup Co., said Campbell probably will expand its range of nine mutual funds from Fidelity Institutional Retirement Services to include more funds from the asset manager series of balanced funds.
P&I's defined contribution conference was co-sponsored by International Business Forum.