By Paul I. Kampner
The Pension Protection Act has been described by most industry observers as the most significant piece of legislation affecting retirees since ERISA was enacted more than 30 years ago. And it might well be as it relates to pension plans. Its significance for those participating in 401(k) plans, however, is far less certain because it does not address some realities that conspire to keep 401(k) plans from reaching their potential.
From inception, it has been assumed that plan problems were employee- or participant-related. While there may be some truth in that belief, the fact is that corporations need to keep in mind that they are not charged with managing corporate assets; they are charged with (1) providing employees with the tools necessary to enable them to save money in a way in which they are most comfortable and (2) administering a plan with assets that belong to others. In a traditional sense, I would argue that 401(k) plans are not even "benefit plans." They are simply vehicles through which employees can provide for their own retirement, if they chose to do so, through payroll deductions.
In recognition of this reality — which has been largely overlooked — plans need to change the entire process.
While clearly the selection of appropriate investment options should be a plan's driver, more often than not the administrative process plays the dominant role. What this means is that plan executives determine who can provide the best support for their plan (record keeping, reporting, communication, etc.) and then see what investments fit the administrative process. This is not only backward, but it also creates a dependence on the administrative process that is neither desirable nor warranted.
A better way of handling things would be for plan executives to determine the most appropriate investment options for their employees and then find an administrator that is able to work with those investments. By following this route, all biases related to investment selection and administrative costs that are found in a combined process are effectively removed. Thus, an investment firm cannot entice someone to use its funds by quoting an administrative fee that is partially or totally offset by its investment fees. Similarly, an administrative firm cannot use 12b-1 fees or other revenue-sharing arrangements it might have with certain fund companies to minimize administrative costs because they are able to "steer" money to certain investments.
To further insulate the plan from any biases that exist either in the investment selection process or administration, plan executives might want to engage a consultant to assist in the process — first to help identify the investment options and then to identify firms that can provide the administrative support necessary to implement the investment policy. Another advantage of this approach is that it strengthens the company's position as a fiduciary — something that has taken on new significance recently with lawsuits filed against several large plan sponsors alleging breach of fiduciary responsibility because the plan is paying too much for the services it receives.
Focusing on investments, allocation and cost are key to making 401(k) plans better.