In a recent article titled "Rigorous standards urged for 401(k) plans" (Pensions & Investments, Feb. 17), William J. McHugh, treasurer of Novartis Corp., provided his insights into the 401(k) industry and the "potentially turbulent" period that lies ahead. The quotes for the article were taken from a speech Mr. McHugh made at the 1997 Pension & Investments Defined Contribution/401(k) Conference.
His comments suggested some plan sponsors are sidestepping their fiduciary responsibility when it comes to the appointment of investment managers, the creation of investment guidelines and the monitoring of investment activities. A longtime proponent of "unbundled" plans, Mr. McHugh went on to imply that increased plan sponsor reliance on full-service or bundled providers is at the root of the problem.
While Mr. McHugh and other plan sponsors quoted in the article do make some valid points, let's take a moment to examine the primary reason bundled providers, mostly mutual funds, have become so pervasive in the 401(k) business during the past decade.
Bundled providers have recognized that the end users of qualified defined contribution plans are the plan participants.
Efforts by the mutual fund industry and bundled providers to tailor 401(k) products and services to plan participants have resulted in such innovations and investor benefits as:
Technology as a means to deliver more responsive and individual service to participants - from the 800 phone lines to the Internet;
Enhanced educational materials that have made participants better investors; and
More investment choices ranging from "lifestyle funds" to self-directed brokerage accounts.
In addition, the suggestion by Mr. McHugh that self-directed brokerage accounts or mutual fund windows are options that could compromise a sponsor's ability to act as a fiduciary is nothing more than fear-mongering. Mr. McHugh and his colleagues need to recognize that not all plan participants are alike.
Frankly, it is counter-intuitive to suggest the chief financial officer in the corner office should have the same investment choices as an entry level employee. Not only should plan participants have the choice of a wide variety of investment vehicles, they want and deserve education and administrative tools that address their individual needs. This "audience of one" approach will be the next revolution in an industry that has long been plagued by a "one size fits all" mentality.
Mr. McHugh and his colleagues also fail to understand a very significant fact regarding this business. Studies clearly show that in the long run the majority of a plan participant's account balance can be attributed to the investment class that is chosen, not the performance or fees of the manager being used. Thus, the plan provider that does a better job of getting employees into the plan and into the appropriate asset classes probably will better serve participants - not the provider with the absolute lowest investment management fees.
Finally, one company treasurer estimated that by using low-expense commingled funds, the company could save their participants 34 cents per day. But participants in his plan probably would have to give up the following:
Daily price access via newspapers;
Increased disclosure due to the Investment Company Act of 1940;
Increased awareness of their funds due to publications like Morningstar or Money;
Better technology such as imaging, Internet access or voice recognition; and
Lower administrative and employee education fees.
Slightly higher investment management fees quite often help pay for these services. The data are clear: The amount of money in mutual funds confirms participants believe the benefits shown above are clearly worth 34 cents per day. Or to put it another way, when participants pick up their 401(k) statement, they do not take off their "retail hat" and put on their "institutional hat."
Mutual funds have gathered market share because they have recognized that the end users of these plans are the participants. So, in all humility, we would suggest mutual funds and bundled providers deserve significant credit (along with a robust stock market) for the vastly increased retirement nest egg that participants now enjoy.
Thomas R. Kmak is senior vice president of institutional marketing and service for American Century Investments, Kansas City, Mo., formed from the combination of Twentieth Century Mutual Funds and The Benham Group.
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