"The good news," he said, "is that plan sponsors are going to start paying more attention to their plans and their fiduciary duties, investment policies and monitoring their service providers more closely … things they should have been doing all along."
Aside from changes resulting from the mutual fund scandal, most industry sources expect 401(k) investing to evolve into a more simple process. Simplifying 401(k) plans by automating enrollment, setting deferral amounts and diversifying portfolios will take center stage in 2004 now that most industry experts say that offering investment advice — either online or in person — hasn't worked.
For 401(k) plans, 2004 will be the year of the managed account, according to most industry experts.
"The industry is responding with more tools and investment strategies and investment education programs," said Ward Armstrong, president of American Express Retirement Services, Minneapolis. "It will be the year for managed accounts and the re-emergence of lifecycle or funds with targeted maturities."
Mr. Armstrong noted that "many of these products were created back in the 1990s" but went largely unnoticed because the bull market made most equity investors look good. After the market fell and many participants became more conservative, 2003 was a good reminder that "the majority of 401(k) participants would benefit by professional help in managing their portfolios." He said he expects most vendors to begin offering a managed account option in 2004 and "promote it aggressively."
About 15 of the 20 largest defined contribution plan providers intend to offer a managed account option by the end of 2004, according to a survey by NewRiver Inc., a Boston financial research firm. Assets in defined contribution managed accounts will total about $50 billion by the end of 2005 and more than $600 billion by 2010, according to NewRiver.
The emergence of managed accounts in 401(k) plans stems largely from the realization that investment advice has not been as successful as expected. Only about 10% of large employers provide advice and generally only a minority of participants makes use of advice. On top of that, many employers may not be using all of the investment education resources at their disposal.
Bill Arnone, partner in the human capital practice of Ernst & Young, New York, cited a survey co-sponsored by CRA RogersCasey, Darien, Conn., which showed that nearly a third of employers do not spend the full allowance they receive from their service providers for their plans' investment education programs.
"It sounds like plan sponsors are leaving money on the table," he said. "Plan sponsors are not giving the same attention to investment education that they are giving to other things."
Because participants seem confused as ever and are not responding to investment advice, Mr. Arnone said plan sponsors should "intervene aggressively" to help unprepared participants invest for the long term.
"Plan sponsors have all the data at their disposal," he said. "They need to look at it more carefully and find those participants who are making mistakes in their portfolios and offer help." A managed account option would provide relief for many participants who lack the time or ability to structure their own investment portfolio.