When the 401(k) plan rolled onto the scene 20 years ago as a revolutionary tax-deferred way for employees to save for retirement, it was new, it was different, it was clunky.
Investment options were few — there were typically two or three — and changing your asset allocation was a cumbersome, paper-intense endeavor that could take weeks.
Essentially, it was a no-frills, one-size-fits-all operation.
After two decades of tinkering, the machine is far sportier, far faster: Many employer-sponsored plans offer 10 to 12 investment options and the ability to move money or get information in an instant, day or night.
Not a bad fit for most participants, certainly.
But on the eve of the program’s 20th anniversary (the IRS gave the 401(k) provisional approval in January 1981), a growing and outspoken minority is pushing for more: the ability to customize their plans.
Some want the freedom to invest in any financial instrument they choose — the whole universe, please. Others want some personalized advice for how to proceed, and they want it cheap.
The common thread is that increasing numbers of participants want it their way, and in pushing for these changes, they are the catalysts that could transform the 401(k) over the next three to five years.
“There are those who will say 80 percent of participants are content or indifferent with what they have, and that just a small segment wants more,” said Ted Benna, a founder of the 401(k) and a leading advocate now for greater individual choice. “I agree, but the fact is that it’s been the minority that has driven change historically, and everyone else is pulled along.”
And he sees the move toward individual choice as unstoppable in an industry that now manages more than $1.5 trillion in assets for more than 30 million Americans.
For one thing, the stakes have grown tremendously, especially for long-time participants.
“People are saying, `I have $150,000 in my plan and I’m limited to the 10 funds my employer picks for me; that does not make sense,'” said Benna, president of the 401(k) Association, a consulting business based in Bellefonte, Pa.
In addition, many Americans who came of age in the Internet era see self-directed investing as their birthright.
The end result, said Ann Mahrdt, a director at Spectrem Group, a Chicago-based consulting firm, will be “continued demand for 401(k) plans to look more like investors’ personal portfolios, with the same bells and whistles they can get with Schwab or Fidelity personal accounts.”
David Katz, for example, is a 401(k) participant who would like to see a greater array of choices in his employer’s plan.
“I’m a socially conscious investor, and other than my company’s stock, there are no options that I can participate in, or that I’m willing to participate in,” said Katz, 38, a geneticist who lives in Evanston.
“I’d like to see either a socially conscious fund that avoids things like tobacco and handgun companies, or have some power to manage my investments through individual stocks,” he said.
Indeed, a small but growing number of employers are starting to offer self-directed brokerage accounts on their 401(k) menus.
Close to 11 percent of large companies offered the option in 1999, up from zero just seven years earlier, noted David Wray, president of the Profit Sharing/401(k) Council of America in Chicago.
And discount brokerage Charles Schwab & Co. reported a rapid pace of growth in the brokerage accounts it offers 401(k) participants, with 66,828 such accounts opened by September 2000, up 91.5 percent from a year earlier.
Still, many employers are sitting on the fence for a host of reasons, Wray said. Partly there is reluctance to plunge into the administrative and technical changes that would be required. But a lot of the balking also has to do with fears that employees would inadvertently torpedo their savings.
Indeed, many observers feel that most 401(k) participants don’t have the skills or the desire to shape a portfolio from the entire universe of stocks, bonds, mutual funds and other financial instruments.
“When 8 in 10 participants use four or fewer fund options in a plan, it’s hard to make a case for unlimited flexibility,” Vanguard Group stated in a recent report.
“A very tiny percentage of employers go for it,” said Gerry Mullane, director of institutional sales for Vanguard, which administers 1,400 plans.
Still, Vanguard now offers a brokerage-account plan because increasing numbers of employers want to know it’s an option.
And some new business models are cropping up that will attempt to bring the broad investment universe to 401(k) participants in readily digestible forms.
Among them is an online plan launched by Persumma Financial, a Newton, Mass.-based arm of MassMutual Financial Group. (Benna is a consultant to Persumma and helped devise the plan.)
At www.persumma.com, plan participants can pick from six model portfolios of funds constructed by independent fund researcher Morningstar Inc. Or, they can pick from a core list of 6 to 17 funds selected from the fund universe by Morningstar. Their third option would be to use a Morningstar planning tool to select their own funds from the overall fund landscape.
Making investment choices can be a daunting task for many 401(k) participants, and many would welcome some advice.
“I’m not a very savvy investor so any free advice I can get to help me plan for my retirement, I’m going to utilize,” said Chad Bope, a 28-year-old e-commerce consultant for Perot Systems in Dallas.
Bope’s employer is one of a small but growing minority that have hired online services to provide personalized advice to their 401(k) participants, in this case mPower Advisors. Some employers absorb the cost, and some pass on some or all of it to plan participants.
Other advice providers include Morningstar’s ClearFuture service, a relatively recent entrant, and Financial Engines, which was founded by economics Nobel laureate William F. Sharpe and which recently added Schaumburg-based Motorola Inc. to its client roster.
Companies have been wary of adding advice components, in part because of the cost and in part because of the liability risks, real or perceived. But the emergence of low-cost online advice providers who are willing to indemnify employers is easing some of the wariness.
“Companies are still looking closely to see how far they want to go on the amount of advice they want to provide, but it is an increasingly popular service,” said Scott Peterson, global practice leader for defined contribution services for Hewitt Associates in Lincolnshire.
