"When we started the program three years ago, I think I had 4 plans. Today, I manage over 55 different plans and will look to add probably 30 more plans this year."
~ K. Gray, 401k Coach® Member

DCPI Reflections on the Future of 401(k) Industry: The Tyranny of Common Sense

(comments: 1)

When asked by their moderator, "What keepsyou up a night?" a distinguished panel of successful 401(k) advisors atthe DCPI Conference in Palm Beach, Florida on December 8th said, unanimously, "…agovernment grab or takeover of our industry.” One advisor sighted the fact thatthe government’s retirement plan (the largest in the U.S.) costs only 0.06basis points to manage. "Compared to that, how can we, in the industry,make a case for average plan costs of 0.85 to 1.25 bps?

Another advisor said, "We aren't getting thejob done. If the goal is to get participants to save to replace 70 to 90percent of their income at retirement, we, as an industry, are failing and I’m afraidthe government will do another ‘land grab’ just like they did with Louisianaand Oklahoma from the French!"

Tom Kmak, the CEO of Fiduciary Benchmarks, madean even stronger case for our focus and energy in the wrong place. "Evenif you did reduce fees in a retirement plan,” Tom said, "it is the leastimportant factor in increasing participant success." He then went on tolist five other factors that have a proven advantage in increasing participantsuccess! Auto features and an increase from 50 percent match up to 6 percent ofcontribution to 100 percent match up to 8 or 10 percent of contribution. This changesparticipant behavior and metrics by 70 to 80 percent Tom proclaimed and thenproved it with his new benchmarking studies! Tom's comments reminded me thatall of the DOL's emphasis on 408(b)(2) as a government mandate and reform totry to lower costs still misses the mark when it comes to moving the dialforward on participant retirement savings success.

Let the alarm be sounded! We must admit that the401(k) system is broken and, in addition, may be restricted by the ERISA codeupon which it was built. We have thrown billions of dollars at retirementsystem. It has been reformed countless times and modified. We have createdsophisticated investments and technology to make it easier for planparticipants to save and invest for their future. We have trained thousands ofadvisors to sell tools and systems. And the result is we haven't moved thesavings rate dial. Six percent contribution, on average, won’t get the jobdone. And we know it!

And 408(b)(2) and 404(a)(5) fee and participantdisclosure won’t get the job done either. We are just going to confuse and upsetmore plan sponsors and participants! And we’ll waste even more time, money,energy and paper on the part of advisors and record keepers in getting thisword out!

The problem with all of these changes by the DOL,all of these reforms (and every reform that came before it over the last 30years) is of no use anymore, because that is merely trying to fix or improve abroken system.

Instead, what we need is a real innovation andtransformation of the 401(k) system. We need a revolution of ideas and afundamental change in the structure of ERISA.

One of the real challenges is to innovatefundamentally in any business, especially ours which is governed by tax lawsthat require governmental approval to change a system. There is also the statusquo. A system of trillions of dollars creates incredible territorial claims byrecord keepers, financial institutions and the politicians. There is a naturalhuman nature desire to fight against innovation that could change the landscapefor everyone involved.

Innovation is hard, because it also means doingsomething people don't find easy. For the most part, changes challenge what wetake for granted. Things that are obvious.

For example, it's obvious that people are lousysavers or don't understand investments and, therefore, will never save enoughfor retirement.

The greater problem with transformation is theTyranny of Common Sense. The things people think can't be done a certain waybecause that's the way they are done. Like a 401(k) should always be self-directedand a 50 percent match up to 6 percent is the norm.

President Abraham Lincoln spoke these words tothe 2nd annual meeting of Congress in Dec 1862. He said, "The dogmas ofthe quiet past are inadequate to the stormy present. The occasion is piled highwith difficulty, and we must rise--with the occasion. As our case is new, so wemust think anew, and act anew. We must disenthrall ourselves, and then we shallsave our country."

Disenthrall. It's a great word. It means thereare ideas all of us are enthralled to which we seemingly take for granted asthe natural order of things – the way things are.

At the time, Lincoln was talking about slavery,which was the natural order of things for millions of Americans – the waythings were. And he was calling for a revolution, a transformation and anabolition of slavery! And it happened.

Today, we stand at a crossroads for our industry.We are finally, I believe, waking up to the fact that all the emphasis we havebeen putting on "fiduciary responsibility, 3(21) and 3(38) programs” hasdone absolutely nothing to transform the failure of the 401(k) system toincrease participant success.

We must acknowledge that the system is notworking. "The dogmas of the quiet past are inadequate to the stormypresent." We know the majority of plan participants will be enslaved by alife of working for a living long after retirement, because the system we havespent billions on will not create a paycheck for life for them at retirement! "Wemust think anew and act anew. We must disenthrall ourselves." Only than shallwe save this retirement system!

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Comment by David Bernarde | May 28, 2013

There is certainly a lot of truth in this article. I find plan sponsors obsessed with running their plan with the least amount of headaches and little else. Most shrug and roll their eyes at the mention of fiduciary responsibilities. Not sure what it will take to steer this ship clear of the iceberg but it sure seems like that is where it is headed. I seem to be gaining some traction with the discussion of knowing, at the plan level, what percentage of participants are on track to retire with 70, 80 or 90% of their pre-retirement income. This is an uphill battle though and while they might like to know that information the do not feel compelled to know it. Still looking for that magic bullet to help them understand.