Money Matters: Are we coming full circle on 401(k) investments?

By Marijoyce Ryan The Daily Record Newswire Does your business maintain a 401(k) plan? Most likely the answer is yes. Now, think back to the early/mid-1980s -- 401(k)s were becoming the latest and greatest of retirement vehicles allowing both employees and employers contribute to participants' account balances with flexibility to increase or decrease amounts based on desire, income, profits, etc. For the most part, the majority of these plans were trustee-directed -- meaning they were held in one commingled investment fund with a mix of stocks and bonds in which everyone participated and shared in their prorata portion of gains/losses. Fast forward a few years -- now that employees are contributing to their own retirement the concept of allowing employees to direct the investment of their account balances gains interest and traction. Now participants can have full control of how to invest their assets, including having brokerage accounts to buy/sell as they choose. Hello 404(c) regulations. The new regulations were designed to help plan sponsors, if they chose to comply, limit their liability in the event an employee makes an unsuitable investment choice and wants to lay the blame directly on the sponsor's shoulders. Now things are getting complicated -- and more expensive. At the same time, studies indicate that participants are experiencing returns less than comparable benchmarks for the various asset classes. Also, returns are decreasing proportionately to the increase in the number of fund choices offered. Clearly, employees are confused. Fast forward a few more years -- full bells and whistles are now available -- daily valuation. Employees can look at their balances all day, choose from 30 to 60 funds, trade all day, use online calculators to tell them how much to save and how to invest, etc. It sounded great! But, now the investment choices are overwhelming and participants are yielding to: Apathy -- staying in the default option Fear -- putting all assets in the conservative or cash option because they don't know what to do. Spreading the wealth -- putting an equal percentage in all of the funds. Smarter than the markets -- moving assets often based on emotion or yesterday's news. The fact is that all of the above will lead to dismal outcomes. But the saga continues. The "dot-com" euphoria is sweeping in scope and employees get caught up in the wave -- even those who are getting very close to retirement go headlong into the equity markets -- only to have their hats handed to them in the spring of 2000. A three-year downturn in the stock market is reality and much wealth evaporates (especially when losses were locked in upon selling stocks at depressed prices). Eventually, the market staged gains again from 2003 to 2007. Again, employees have too much invested in stocks because they are trying to make up for the losses of the dot com bust. The increased fees (some of which were not required to be disclosed) for the bells and whistles, lack of investment education and excessive choices has lead to a generation of savers with underperformance and impaired ability to retire with adequate wealth. Enter 2008. The recession and market downturn are vast and touch everyone. Several employees move their assets to cash after experiencing losses. Now, they have locked in losses again and fear prevents them from moving back in -- they miss the strong upsurge in 2009-2010. Now their fear turns to depression. Enter the DOL and regulation 404(a). The new regs take effect in 2011 and generally apply to plans with investment options. They require 401(k) sponsors to provide employees with new routine reports covering administrative and investment fees, investment performance and market benchmarks. This will add to the cost of maintaining plans but does nothing to protect employees from making inappropriate investment choices. What do I do if I am a small-business owner who is spending too much time and money attending to my 401(k) requirements? A viable option is to hire a competent investment manager, eliminate investment choices in favor of one commingled balanced portfolio. This will lead to better investment outcomes for participants, lower overall costs, and reduce the time spent on plan matters. More importantly, it will give me more time to make more widgets. Hmm ... sounds like the early 1980s. Perhaps simpler is better. ---------- Marijoyce Ryan, CPP, is vice president of fiduciary services for Karpus Investment Management. She can be reached at (585) 586-4680. Published: Tue, Jul 5, 2011