chalk talk | PLANADVISER March/April 2012

Unattainable Goal

Are we destined to forever fix the 401(k)?

By Steff C. Chalk | March/April 2012

As we bask in the afterglow of first-quarter equity returns, it is a slam dunk that a regulator, congressperson or professor will soon attempt to hijack the national media over the fact that… "The 401(k) needs fixing!" Such a headline will be followed by a case study that illustrates the snookering of the American worker. The scenario will be further illuminated by citing the thousands of dollars in value "lost" by this worker to the mavens of Wall Street. Therefore, the cry will go, "something must be wrong" with a retirement system that would permit hardworking Americans to lose so much money prior to receiving their gold watch! (This is where the media inserts the glossy photo of a dashing Bond-esque figure in a dark-blue, pinstripe three-piece suit, mulling over the decision of—the Ferrari or the Lamborghini?)

Problems Have Been Identified!

Not only have American workers en masse lost their assets and dignity, say the critics, but so have their spouses, children and in-laws been bamboozled by a savings arrangement that "needs fixing."

Let’s take a moment to evaluate this argument.

Asset balances are insufficient to sustain retirees.

No kidding. No one who works in our industry could call that "news." Let’s review. Congress passes a bill that enables the American worker to dictate the direction of a portion of his discretionary income.

Section 401(k) permits an option of either:

a.) accepting the cash; or

b.) deferring the compensation into a retirement savings vehicle that permits the worker to defer the payment of taxes.

Thirty years later, though, the plan needs to be "fixed" because this voluntary, supplemental-savings plan has amassed only $2.8 trillion dollars? Can we as an industry try to find more ways to increase sayings? Yes. I just do not agree that the 401(k) is broken. Because we have not been successful in educating plan participants about savings needs (see below).

These plans offer too many investment choices. 

Really? How many are too many? When the plans were established during the early 1980s, normally there were just one, two or three options. Some of those plans let you utilize a percentage of all three. When some participants experienced difficulty in having their three asset class percentages total 100%, many of us recognized these plans needed more work, and the cottage industry of participant education arose. Yes, education was added to the 401(k) services menu to fill a need. Education was never a revenue enhancer for either the vendor or the retirement plan adviser.

The immediate point: It is too simple to openly state that 401(k) plans of today are not offering the correct number of investments or say that every plan has the wrong number of investment choices. This is because it is extraordinarily difficult for anyone to state, with conviction, what the "correct number" of investment choices is for a 401(k) plan.

After all, the choice everyone wants is the no-risk investment option that goes up by 25% every year. Really!

The 401(k) has too much leakage.

>Face reality. Do you recall who deposited the funds into these plans? Do you understand who owns the 2.8 trillion dollars? If the owner of 401(k) plan assets can use that money to forestall foreclosure, then why not? If separation-of-service is a stressful time and that stress can be reduced or eliminated by a withdrawal, then isn’t that the participant’s prerogative?

Plan participants need to be treated as adults. The participant’s decision to extract monies from his retirement plan comes at a cost. In my opinion, no governmental entity should ever be permitted to restrict a participant’s ability to access his own money—even if we all know it will hurt his account balance in the long run.

Perhaps it makes sense to continually adjust the features and benefits of the largest self-funded pension system on the planet. Continuous improvement of our business models, processes and client outcomes are making a difference—but to that regulator, congressperson or professor wanting to stir the pot, I say, you cannot "fix" that which is not broken!

Steff C. Chalk is CEO of the Fiduciary Consulting Group, a fee-only fiduciary consulting practice ­serving corporations and nonprofits. A judge for the PLANSPONSOR Retirement ­Plan Adviser of the Year award, and a faculty member of the PLANSPONSOR Institute, he is also the ­co-author of How to Build a Successful 401(k) and Retirement Plan Advisory Business.