Retirement Plan Industry Could Use a Little Zen

“Sometimes it’s hard to believe I’ve been working in this space for more than 20 years,” Josh Cohen, managing director and head of defined contribution for Russell Investments, recently told PLANADVISER.

It’s not that he hasn’t enjoyed the time working with plan sponsors and provider partners—quite the contrary. There’s simply been so much industry innovation and reform during the time period that everything has pretty much remained fresh and new. From customer interactions to back-end technologies to the most fundamental fiduciary regulations and compliance activities, very little in the defined contribution (DC) industry looks like it did back in the 1970s or ’80s—or even the ‘90s or 2000s.

“I was around when defined contribution (DC) plans first started to emerge as a central approach to saving for retirement,” Cohen explains. “In some ways we are still witnessing the emergence of DC plans. Certainly the approach to DC has not stopped evolving over this time, and there’s no sign the evolution is slowing. Actually I believe we’ll look back on this decade as a truly formative moment for the U.S. retirement system.”

Over the years Cohen says he has had some tremendous opportunities to help influence the DC space, including through a term on the ERISA Advisory Council. One lesson he has consistently drawn is that the retirement planning industry, taken all together, is very good at coming up with new solutions and innovative approaches to problems, but it’s not as good at finding balance and sticking with what works. This is demonstrated by any number of examples, Cohen says.

“Whether we want to talk about the active versus passive management debate, or complex versus simplified investment menus, there is always a strong push and pull moving the industry in one direction or another,” Cohen suggests. “There is very little equilibrium. Perhaps the quintessential example can be seen in the trends around investment menu construction.”

When he first started out servicing plans at Hewitt Associates (long before the Aon merger), a 401(k) plan was much more likely to have just a handful of very simply described equity investment options and perhaps a bond fund or two. Over time, going into the mid- to late-90s, there was a big push for more choice and more complexity, boosted partly by providers’ interest in differentiating themselves and partly by new technologies and other aspects. Participants and sponsors also helped fuel the trend, demanding high-performing funds they had heard about from friends or colleagues, for example, or asking for a self-directed brokerage window to really take control of their own investments.

NEXT: Far cry from where we are today 

“Providers and sponsors allowed this to happen because DC was still thought of as complementary to the pension plan and Social Security. It was also helpful that the markets were strong and people really weren’t losing money on their investments. Whatever they tried seemed to work,” Cohen says. “Today we know better.” 

The industry has learned, for example, that choice overload is a real problem and that the increased choice architecture built into DC plans did not go a long way towards improving outcomes. In fact many people grew less diversified in their accounts and were actually worse off from a retirement readiness perspective thanks to the innovations of the '90s. Today the pendulum is again swinging towards simplification, Cohen says, and the industry is even returning to the white-labeled investment approach initially used in 401(k)s. He feels this is a positive trend and hopes the industry can eventually find balance between the two philosophies—leveraging lessons learned to pursue good client outcomes. 

The other example Cohen likes to point to is the active versus passive investment management debate. In the 20 years he’s been working with DC plan clients, he has seen the needle move back and forth on this matter, with sponsors sometimes favoring more expensive active approaches and sometimes favoring cheap passive approaches.

“In the last several years especially, since the emergence of a new class of litigation targeting retirement plan sponsors for allowing excessive fees, especially on the investment menu, we’ve seen a related trend in which sponsors have moved aggressively towards using mostly passive or all passive options on their fund menu,” Cohen says.

NEXT: Back and forth, back and forth 

As with the complex versus simple menu question, plan sponsors' motivation to offer the most inexpensive investments possible is understandable, Cohen says, but their response is not necessarily the most effective one. 

“It’s only a matter of time before plans start getting sued for funds that are passive and very cheap from a market-wide perspective," he warns "Indeed this has already happened with the newly emerged Anthem fee case. In that case the plan sponsor was sued for a variety of things, but one of the claims is related to the sponsor not pursuing the best possible pricing for a passive investment that only cost 4 bps, because plaintiffs charge that an identical 2 bps version was available."  

While this focus on fees is laudable and important, Cohen feels the decision to move to a purely passive approach seems to be based on two dubious premises, namely 1) that it is safer for fiduciaries to offer funds that have the lowest absolute cost and little risk of underperforming their benchmark, and 2) fiduciary oversight obligations are therefore eliminated. 

“Simply put, if you decide to implement passively managed investments in your DC plan, your job as a fiduciary is not over,” Cohen warns. "You are subject to the same duty to monitor either passive or active investments. Both approaches can be prudent or imprudent. At Russell, we advocate for a blended approach that takes the best of both worlds."

What’s the lesson for plan advisers and sponsors in all this? “We have to all work together to keep bringing balance to this industry,” Cohen concludes. “Probably the most important aspect of the conversation right now is the fiduciary rule debate. We need to make sure to protect investors from bad apple advisers without shutting good advisers out of the system. This idea of balance applies to everything we do.”