(k)Plans:Windows Dressing
|
|
Illustration by John Hersey
|
As fund menus tighten, interest in self-directed accounts grow
When the market is thriving, defined contribution plan participants are usually a happy bunch. However, when the market takes a nosedive, as it has during the past year, participants grow grumpy and start complaining about investment performance—and the options available on their retirement plan menus.
That is why now might be a good time for plan sponsors to at least consider the idea of offering their employees a self-directed brokerage (SDB) account window. When participant investors have total control over where their 401(k) assets go, they cannot blame their sponsors if the returns keep sliding—or so the argument goes. In fact, by offering an SDB account, some say sponsors can enhance their immunity to fiduciary responsibility, allegations of mismanagement, and law suits.
“When things are looking rough, employees become a lot more critical of sponsors,” says Stephen Cunha, Director of Retirement Services for Baystate Financial Services of Boston. “There probably are going to be complaints about investment performance. Some employees might say, ‘I want this [brokerage account] option now.’” Robert Jesch, Schwab’s Product Director for SDB accounts, reports that his firm observed a 12% increase in new brokerage accounts opened in 2008.
Still, do not expect participants to come galloping through the door to sign up for a brokerage account—not that that is a bad thing. The accounts, aimed at savvy investors, are arguably not suitable for most participants. For the most part, the take-up tends to be most prevalent by those in the “C suite,” or for highly educated participants like lawyers or physicians.
Jesch believes another factor, besides the economy, might be igniting that growing interest in brokerage accounts among 401(k) sponsors. When it comes to investment choices in defined contribution plans, the trend over the past few years has been to reduce the number of options by adding all-encompassing asset-allocation models like lifecycle funds and managed accounts. These vehicles take away the choice participants are forced to make if they simply have a menu of 20 or even 50 mutual funds and fixed-income vehicles on the investment lineup. Jesch says some sponsors are electing to offer their employees a menu with only these pre-mixed asset-allocation models, and then throw in a brokerage account for the minority of employees who still do want to make investment choices for themselves.