A Greenwich Associates research report found that only a third (35%) of defined contribution plan participants use the 401(k) Internet information tools provided by their companies. Not only that, but according to the estimates of executives at mid-size pension funds, the number of participants taking advantage of them to their full extent seems to be a mere fraction of that.
So, Greenwich asserted, after rolling out Web sites designed to help 401(k) participants more effectively save for retirement, corporate plan sponsors are now coping with an uncomfortable realization: Most people don’t use them.
At least in part for that reason, the proportion of mid-size companies offering investment advice via the Internet dropped to 43% in 2003, from 55% in 2002. “Working through an Internet questionnaire requires a degree of financial know-how and patience that only a relatively small percentage of 401(k) participants possess,” said Greenwich Associates consultant Chris McNickle. “Even participants who do use the online questionnaires would rather make their investment choices based on in-person advice than on the basis of a computer’s recommendations.”
According to Greenwich Associates, the failure of the Internet to meet the needs of defined contribution (DC) participants as promised, represents a major financial hurdle for plan sponsors and service providers. As the use of defined benefit (DB) plans declines among mid-size companies – from 49% of these companies offering DB plans in 2002 to 43% last year – DC plans are becoming ever more important to companies and employees.
With so many employees relying on DC plans, plan sponsors have recognized the importance of providing their participants with both investment education and advice. While a third of companies reported providing only general investment education – without specific investment advice – in 2002, that number shrunk to just 14% last year.
Currently about 30% of mid-size companies provide advice via human representatives, with roughly 12% offering telephone service and one in five offering seminars or face-to-face service. But whether personal service is provided over the phone or on-site, “either way, the economics just don’t really work out,” noted Greenwich Associates consultant John Webster. With the average 401(k) account today worth around $40,000, service provider fees in the range of 1% generate just $400 a year, which must cover investment management, administration, and quarterly participant statements. “That doesn’t leave a lot for the compensation of those phone counselors or in-person advisers,” Webster said.
Moving on to other topics, Greeniwch also reported that a survey of 131 large US institutional investors reveals that executives at 60% of these institutions see controversial trading practices as widespread in the industry and not just the actions of a few mutual fund companies. Almost 60% of the institutions responding to Greenwich’s online survey use a mutual fund firm currently under investigation for improper trading practices such as market timing and late trading. These funds indicated that the ongoing scandals were eroding their confidence in the mutual fund industry.
Also the number of mid-size companies using cash balance plans continued to rise in 2003, despite a July ruling by a federal judge that brought the overall growth of cash balance programs to what Greenwich Associates believes will be a temporary halt. The use of cash balance plans among both mid-size and large companies increased sharply in the early part of last year. Among mid-size firms, the overall proportion of companies using the plans rose from 4% to 6%. At very large corporations – those with pension assets exceeding $5 billion – usage jumped from 31% to 39%.