Talk of details turns to participant legal actions at conference on defined contribution
San Diego - Lawsuits and show-biz allusions were on the minds of speakers and attendees at Pensions & Investments' Defined Contribution West Coast Conference.
Speaker Robert A. Benish, vice president of Scudder Kemper Investments, made use of a Vulcan motto from "Star Trek." Ron Eisen, president of Investment Management Consultants, illustrated his insider tips on due diligence for record keepers with stills from the movie "Top Gun." And Gregory D. Metz-
ger, consultant with Watson Wyatt & Co., used case studies titled "The Mad Hatter" and "Greed" in his humorous presentation "Comparing Pears and Kumquats"
But the winner of the informal conference-goers' award for most entertaining production by a service provider was Schwab Retirement Plan Services' Vice President Jim McCool's video featuring Mr. McCool, an employee from 2005, and a robot dog. After leaving the podium to converse with Joe Participant on the "future phone" in the video, Mr. McCool - borrowing a David Letterman trick - grabbed a cup of water in the video and returned to the podium holding it.
But the conference sessions were not all bright lights and grease paint.
Needs of the many
Mr. Benish admonished plan sponsors and service providers to keep in mind the Vulcan motto "The needs of the many outweigh the needs of the few" when dealing with plan participants.
"We're in a new era of pension activism. Participants realize that they have rights," Mr. Benish said in his keynote address, "Plan Participants as Crash Test Dummies."
"Plan participants are becoming a force and you have to treat them as such," he warned, becoming the first of many speakers who mentioned recent lawsuits brought against defined contribution plan sponsors.
About 72% of participant balances are invested in equities, and a number of people have 100% invested in stocks, he said. At the same time, participants act like mini-portfolio managers. "Some are mini-Frankensteins," he said. "You know who they are. They are investment junkies who want to be day traders."
And plan sponsors and service providers send mixed messages. Sponsors include loan features when the object of a DC plan is long-term investing, Mr. Benish said. Sponsors pay matching contributions in company stock, add company stock as an investment option and simultaneously talk about diversification.
"What happens when the bull market turns to a bear?" he queried.
The majority of plan participants say the reasonable average rate of return is 21%, according to a recent Scudder Kemper survey. Most people under age 35 expect an average rate of return of 26.5%; while those over age 65 still anticipate an average return of 16%. In contrast, experts estimate the average rate of return this year will be around 12%, he said. "If it (the market) does not deliver, who will have to tell them why?" Mr. Benish said.
The antidote is to include plan participants in decision-making, including vendor searches, he said, proposing a four-step education process. The first step is to create a partnership with participants, outlining common goals. The next step is to create shared responsibilities - for example, if a sponsor wants to add investment advice, company executives could pass along the cost but make sure the participants know about it from the beginning of the process. The third step is to survey participants; and the fourth is to communicate formally and informally with participants to inform them of developments.
"Remember, the ultimate benefit is for the plan participant," Mr. Benish said. "You'd better invite them to the party, buy them a drink and make sure they are comfortable."
In a session titled "Fiduciary Alert!" Ruth Hughes-Guden, principal of Morgan Stanley Dean Witter Investment Management; Ted Benna, president of 401(k) Association; Gerald B. Goldberg, vice president of Prudential Securities Inc.; and Thomas Z. Reicher, a partner with San Francisco law firm Cooley Godward LLP, discussed lawsuits participants have filed against First Union Corp. (P&I, Sept. 20, 1999), SBC Communications Inc. (P&I, May 1) and New York Life Insurance Co. (P&I, May 29).
"As we say in California, the Big One has not hit yet," Mr. Reicher said. "What is the Big One? Mutual funds or a retirement plan taking a real dive. What we've seen have been some minor tremors."
To protect themselves, sponsors should have clearly focused procedures for selecting and monitoring investment options, he said. DC plan sponsors should communicate the procedures to participants and be sure to follow them.
Mr. Goldberg echoed these sentiments, warning plan sponsors of the "awesome responsibility" they take on when they offer a DC plan.
"There should be an unbreachable firewall between decisions made in the 401(k) and those made from the company's perspective," said Mr. Goldberg, who is also an attorney.
The potential liability is enormous. "Some plan sponsors may feel a certain temptation to leverage what resources they have," he said.