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Benna Says Employers Should Give Up 401(k) Gatekeeper Role:

The Man Who Invented the 401(k) Plan Thinks It's Time to Re-Invent It.

Ted Benna, who gained IRS approval for the first 401(k) plan in 1981, is now president of the 401(k) Association and a consultant to the defined contribution plan industry. Speaking at the SVIA Forum, Benna said the current 401(k) model in which employers select the investment options menu their plan participants can choose from, and then leave participants to pick according to their own understanding of investment principles, simply isn't working as well as it could or should.

Most workers aren't investment experts, Benna said, arguing that even the new online investment advice services available to many of them won't change that. One problem is that use of the advice services is voluntary, and only about 10% to 20% of the people who have access to them actually use them. What's more, those who do use the models tend to be those who are most knowledgeable about investing. The people who really need help, he said, aren't getting it.

Based on his experience working for plan sponsors, Benna doesn't think that allowing employers to make investment decisions for plan participants is the answer, either. What would work, he suggests, is a model in which participants would be given access to a menu of professionally managed lifecycle portfolios developed according to sound investment principles. The portfolios would gradually become more conservative as investors neared retirement age. Plan participants could simply pick a portfolio timed to their retirement date and designed to reflect their tolerance for risk: aggressive, moderate or conservative. However, participants who wished to do more could still select their own investments from a mutual fund window.

With these structured portfolios in place, Benna says, employers and plan providers could be offered a fiduciary safe harbor from liability for the performance of participants' portfolios. Participants, meanwhile, wouldn’t be compelled to learn the ins and outs of investment strategy.

"It makes no sense for employers to bear responsibility for how you invest your money for retirement," Benna said. "I believe we are headed for a system in which the employer no longer has that gatekeeper role."

To gain their fiduciary safe harbor, plan sponsors and providers would have to ensure that their 401(k) plans meet several important criteria, Benna added. For example, he suggested that participant-paid expenses for the structured portfolios could not exceed 75 basis points. Additional participant-paid fees to access the fund window could not exceed $150. If participants chose to invest in the structured portfolios, they would only be allowed to choose one. Participants who stay in a structured portfolio for at least 20 years, Benna suggested, should receive a 7% guaranteed minimum average annual return. Finally, an IRA option would exist allowing participants to retain their 401(k) portfolio if they change jobs or their employer is sold.

As an alternative to this model, Benna said participants could simply be permitted to invest in IRAs under the same rules that now apply to SIMPLE-IRAs. Employers could pick a single financial entity to receive all new deposits, but participants could transfer the money they accumulate to any other financial organization annually without penalty.

Not everyone believes that Benna's ideas will take root. Dallas Salisbury, Chief Executive Officer of the Employee Benefits Research Institute in Washington, D.C. and also a speaker at the SVIA Forum, put the odds "somewhere close to zero percent." Among other things, he said he wouldn't expect plan sponsors to be interested in sponsoring a benefit program for which they received little credit from their employees.

But Benna suggested that in as little as 8 to 10 years the 401(k) market could evolve to embrace the new model he's described. In the meantime, he encouraged vendors of stable value products to think about how they will retain their share of the 401(k) market if, in fact, the industry changes in the ways he envisions.

"Clearly, we are already moving rapidly into a period where individuals are going to be in control of their retirement assets outside of the 401(k) market," Benna said, noting that many of the baby boomers now approaching retirement are likely to roll their 401(k) assets into IRAs once they quit work. As that happens, he said, "IRAs will be king, not 401(k)s."

"We're going to see change," Benna concluded. "The biggest challenge the stable value industry faces is keeping the dollars you've been used to capturing in 401(k) plans as control moves to the individual rather than the corporation."

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