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Way back during the Carter Administration, Ted Benna, an employee-benefits consultant, set out on a search for a better way for companies to help their workers save for retirement. He found it in a paragraph of the tax code headed "401(k)," and, in 1981, he created the first 401(k) plan, becoming its biggest booster as he promoted their proliferation far and wide.
Benna is still a benefits consultant, and he is still searching for a better way. While he's astonished at the growth in 401(k) plans, which last year held $1.7 trillion, according to Chicago-based consultant Spectrem Group, Benna is still looking for ways to improve his baby. To that end, he recently has been circulating his blueprint for 401(k) reform among interested parties, including officials at the Treasury Dept. and on Capitol Hill.
His proposals (available here as an Adobe Acrobat file), call for creation of a series of "managed portfolios," suitable for people planning to draw on their nest egg at different future dates, such as 2010, 2015, 2020, and so on. In addition, for each target date, he would create three distinct portfolios, each with a different level of risk. Benna also likes the idea of allowing savers to opt out of these managed portfolios and run their own investment program -- for funds, not individual stocks.
To learn more about all this, I reached Benna recently by phone at his Bellefonte, Pa., office. Here are edited excerpts of our discussion:
Q: What's the problem with 401(k) plans today?
A: We originally started with a very simple structure. Most plans initially had two investment alternatives, a guaranteed and a growth fund. And that made it very easy to explain to employees what the different alternatives were, and the risk and potential rewards. It wasn't complicated. It took about five minutes at most to do it.
Q: And now?
A: Now, plans on the average have 10 to 12 alternatives, and of course there are a growing number that have 20 and 30, or have moved to the "open-window" environment and offer thousands of alternatives. And we're going to keep moving to a more open environment.
Q: Why?
A: A subset of the participant base, probably somewhere in the 10% to 20% range, is more knowledgeable, proactive, and continues to push for more, and basically say, "Hey, look, it's my responsibility. It's my money. Why don't I have the same alternatives in my 401(k) as outside my 401(k)?"
Q: And everyone else?
A: The bulk of participants, probably 50% or more, are either indifferent or are already having enough difficulty picking from what they have. So they're not anxious to have a broader array, and in fact, many of them are saying, "Hey, I'm confused."
Q: What's the solution?
A: One answer that has been tried is education. There has been a lot of effort put in and money thrown over the last few years at educating. We said, "We'll make participants smart enough." And that has helped, but clearly there has been a realization that we're not going to turn 40 million to 50 million average individuals into professional investors. It's not a realistic expectation.
Q: I see.
A: Now, advice is emerging as the magic pill: "We need to give 'em advice, and that will provide an answer." But the fundamental problem we still have with advice is, generally when it is provided, even at no cost to employees, there's a very small segment of the participant base that is actually using and taking advantage of the advice. And it tends to be those who are already more knowledgeable and savvy.
Q: And not all employers want to get into that advisory realm.
A: Employers and [financial-services] providers are being hamstrung to a rather significant extent by the fear of liability -- of being sued. So that's a significant part of what I'm proposing, providing the opportunity for the liability structure to be removed.
Q: Tell me how this would work.
A: What I'm proposing is a structure where the participants really have two investment alternatives: One is structured portfolios, which, when you dig behind them, are pretty sophisticated. They are risk- and time-horizon oriented. A 35-year-old could opt into a portfolio and basically go to sleep and retain it for the rest of his life, including retirement years, because it would be managed for you, automatically ratcheting down the risk level as you aged.
Q: So this would be a mix of both the idea of life-style portfolios, which mix stocks, bonds, and cash to modulate risk, plus the idea of target portfolios, where the fund aims at a particular date X years into the future for its liquidation. Would these portfolios have a guaranteed return?
A: Well, that's what I have thrown in, which has certainly attracted interest.
Q: Tell me about that idea.
A: If you're in one of these portfolios for at least 20 years, you would have a guaranteed average annual return of 7%.
Q: Is that 7% before or after inflation?
A: Just the flat 7% [including inflation].
Q: I see, 7% in nominal terms.
A: Yes. And then, also, I put a lid on the expense side that participants could not be charged more in any of those portfolios than 75 basis points [a basis point is one one-hundredth of a percentage point].... Another of the problems that this addresses is that, in my opinion, from hands-on experience of working with employers, most of them are really not well-equipped to handle this responsibility. And they have no business really picking the funds that employees are going to be putting their money in.
Q: You've seen some horrors, huh?
A: One of them was a $30 million plan, and I had the opportunity of sitting in when they did the interview of the five finalists. And when they got to narrowing it down to the final two, the first one they scratched off the list of consideration was the one I thought probably should have gotten the business, or certainly should have been in the final two. And they scratched them because they sent four females to the meeting.
Q: Unbelievable!
A: The reasons for decisions are rather shocking sometimes.
Q: I gather your proposal doesn't stop there, with the pre-picked portfolios. What are the other options?
A: A 401(k) IRA. That would be structured operationally, like the SIMPLE IRA, but it would still be subject to all of the compliance testing and so fourth of a 401(k). So what an employer would be able to do is to fund the 401(k) using individual IRAs, with the same rules that apply to a SIMPLE IRA. And there are some major advantages to the employer. They would be removed from liability, but in addition, most of the costs of running the 401(k) would disappear, because the recordkeeping that is now necessary with a 401(k) would now be eliminated because the money would be going into individual IRAs.
Q: Where would the very active, supposedly savvy investor fall in all of this? Is there an option for self-directed brokerage accounts?
A: Yes, in the first option there is. A [brokerage] window would be open. I'm recommending, though, that the window would be open to funds and not include individual stocks. And my reason -- I know that will be an issue of debate if this thing moves ahead -- is the potential for disaster to an individual in investing in stocks. I don't invest my retirement money in individual stocks -- and wouldn't. The odds are against you.
Q: Have you heard of bad situations where an employee lost a lot of money by investing in individual stocks?
A: I haven't directly, but I know that company stock or employer stock is a big issue. Certainly, some of the plans that are very heavily invested in company stock obviously have participants in them who are taking 50% or greater losses in this market.
Q: Now, in your proposal, if an individual chose a self-directed brokerage option, would he also be guaranteed at 7% return?
A: He would not. No lid on the costs and nothing assured on the return. Basically, the individual is walking out there in an open market and they're subject to whatever they decide to do.
Q: I gather you've begun to discuss your proposal in Washington. What kind of reaction did you get?
A: The most negative response I got was from somebody from an insurance company who wondered how their product would fare in this structure. My answer was, "That isn't my problem." I'm proposing something here that is good for participants. It's good for employers, and it's not necessarily hostile to [financial-services] providers.... Then, I met with Treasury [Dept. officials], and I expected to be there half an hour and that turned into two and a half hours. And they were quite intrigued.
Barker covers personal finance in his Barker Portfolio column for BusinessWeek. His barker.online column appears every Friday, only on BW Online Edited by Douglas Harbrecht
Copyright 2001 , by The McGraw-Hill Companies Inc. All rights reserved.
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