SAN FRANCISCO -- People in the defined contribution industry should watch for possible spillage from the movement in Washington to pass cash balance plan legislation, said Gary Gasper, partner at Washington Counsel PC;
* Plan sponsors and service providers are focusing their education efforts on investment education and not enough on planning for retirement, warned Betty Meredith, president of Discover Learning Inc.;
* If management fees dropped to an average of 28 basis points, only 10 out of 30 service providers would still be competitive in the defined contribution market three years from now, said Ronald Eisen, president of Investment Management Consultants Inc., Portland, Ore.
These are a few of the depth charges dropped at the Pensions & Investments Defined Contribution/401(k) West Coast Conference in San Francisco last month.
The biggest laugh came on day one, when panelist Brian M. Rom, president of Investment Technologies, New York, who usually makes presentations in a serious and cerebral speaking style, quipped: "Our groundbreaking announcement is that we will pay you to give advice."
The other two panelists of this forum were E. Drake Mosier, chairman and chief executive officer of 401k Forum Inc., San Francisco, and Christopher L. Jones, vice president of Financial Engines Inc., Palo Alto, Calif.
Summarizing the claims and counterclaims of the three Internet advice providers, Shiv Mehta, a partner at J.P. Morgan/American Century Retirement Plan Services, New York, said 401k Forum includes subjective fund performance analysis, while Financial Engines sticks to qualitative and quantitative methodology and Investment Technologies makes recommendations at the asset-class level and then ties it into the 401(k) plan.
All of the advice providers are registered investment advisers and contractually assume the role of fiduciary when providing advice and guidance to plan participants. All three make specific recommendations and use technologies that calculate probabilities, Mr. Mehta said. Two of the three use optimization and quantitative techniques, he said.
The differences are in the way Internet advice-givers come up with the recommended portfolios, he said. 401k Forum uses pre-mixed portfolios, while Financial Engines "builds portfolios on the fly with optimization and Monte Carlo simulation," Mr. Mehta said. Investment Technologies creates models at the asset class level but "within the constraints or restrictions the plan sponsor requires."
The advice providers also differed in their treatment of company stock. Mr. Rom said his company treats company stock the same as other funds. "We will model its characteristics, the characteristics will be incorporated, and it will be recommended or not based on its investment attributes," Mr. Rom said. The other two advice providers do not advise participants to buy or sell company stock.
At 401k Forum, company stock is considered in its "nest egg calculations" pertaining to the assets a participant holds for retirement as well as in its assessments of the likelihood the person will reach his or her retirement goal.
Financial Engines begins with a detailed analysis of the characteristics of the particular company stock by mapping the underlying style and risk characteristics, explained Christopher Jones, Financial Engines vice president of financial research and strategy.
Financial Engines also shows participants what will happen to their retirement forecasts and what level of risk plan participants will be taking on if they increase or decrease their company stock holdings, Mr. Jones said.
Face to face
The conference included discussions about in-person investment advice for participants and, later, at least one advice provider took exception to claims that 401k Forum was the first service provider to offer investment advice.
Michael Scarborough, president and CEO of The Scarborough Group Inc., Annapolis, Md., said he began providing advice on investments and money management of retirement accounts to individuals with defined contribution plans well over a decade before 401k Forum, Financial Engines or any of the other Internet providers hit the scene.
The company contracts directly with individuals, not plan sponsors. And these are not all high-net-worth individuals, Mr. Scarborough said. The average client is around 44 years old and has an annual income of about $50,000, he said.
In the future, Mr. Scarborough said, plan sponsors that choose to offer participants advice will offer several service providers and let participants choose among them. The service could be paid for through a kind of cafeteria plan for the benefit of participants, he said.
But advice was not the only topic covered at the conference. Discover Learning's Ms. Meredith, moderating a panel on investment education, explained plan sponsors and service providers should make the financial education they provide more effective by accounting for differences in learners and taking into account the stages of financial literacy.
About 29% of children are visual learners, 34% are auditory learners and 37% are kinesthetic, or more active, learners, she said. As they grow into adulthood, most people move toward the visual, but the underlying differences remain, Ms. Meredith said. A variety of approaches must be taken, including meetings, paperwork and interaction, to account for these differences, she said.
The education program should match topics and media to desired results and select media and topics most suitable for the target audience, Ms. Meredith said. For example, people who are not participating in their companies' defined contribution plans could be provided with retirement gap analysis or goal-setting information, as well as education on budgeting and debt reduction, she said.
Need hard questions
Investment Management Consultants' Mr. Eisen urged attendees to break away from a mere "check-list mentality" when reviewing service providers. Plan sponsors need to ask such hard questions as, "How long will the record keeper stay in business if the bottom line rate of return is below 10%?" he said.
Technology is a panacea for service providers, he said. "Technology adds services, speed and reliability. Moreover, there is a continuous demand for more and better technology in the defined contribution market," he said. But it also adds cost, which is not being passed on and has to be borne by service providers from "profitable business volume."
Consolidations among service providers will increase, including deals between industry leaders, within the next seven to eight years, Mr. Eisen predicted. Driving this trend will be baby boomers' accounts, which will become "leaky buckets" as they cash out their defined contribution accounts, he said.
One of the hottest debates this year has revolved around cash balance plan conversions, said Washington Counsel's Mr. Gasper.
"The escalation of the debate . . . has been reflected in the legislation introduced this year on the subject," Mr. Gasper said. "The bills introduced to date range from requiring enhanced disclosure of planned conversions to much more aggressive legislation imposing strict prohibitions on the design of cash balance plans."
This new awareness could affect the defined contribution world by "causing increased scrutiny," he said. Moreover, some cash balance plan legislation has been written so broadly, it could be construed to apply to defined contribution plans, he said.
At least one speaker gave a nod to the new millennium.
"Will defined contribution plans survive the new millennium? I have no idea; that is for 1,000 years from now," said Janet M. Quilici, manager of retirement plans at Transamerica Corp., San Francisco. "Will they survive into the new millennium? Yes. That's only next year and I think they will survive that long."
The question is what they will look like, she said. "I do not have my crystal ball," she quipped. "I left it at home with my laptop. They are both really heavy."