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

When asked by their moderator, "What keeps you up a night?" a distinguished panel of successful 401(k) advisors at the DCPI Conference in Palm Beach, Florida on December 8th said, unanimously, "…a government grab or takeover of our industry.” One advisor sighted the fact that the government’s retirement plan (the largest in the U.S.) costs only 0.06 basis 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 the job done. If the goal is to get participants to save to replace 70 to 90 percent of their income at retirement, we, as an industry, are failing and I’m afraid the government will do another ‘land grab’ just like they did with Louisiana and Oklahoma from the French!"

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

Let the alarm be sounded! We must admit that the 401(k) system is broken and, in addition, may be restricted by the ERISA code upon which it was built. We have thrown billions of dollars at retirement system. It has been reformed countless times and modified. We have created sophisticated investments and technology to make it easier for plan participants to save and invest for their future. We have trained thousands of advisors to sell tools and systems. And the result is we haven't moved the savings rate dial. Six percent contribution, on average, won’t get the job done. And we know it!

And 408(b)(2) and 404(a)(5) fee and participant disclosure won’t get the job done either. We are just going to confuse and upset more 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 this word 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 30 years) is of no use anymore, because that is merely trying to fix or improve a broken system.

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

One of the real challenges is to innovate fundamentally in any business, especially ours which is governed by tax laws that require governmental approval to change a system. There is also the status quo. A system of trillions of dollars creates incredible territorial claims by record keepers, financial institutions and the politicians. There is a natural human nature desire to fight against innovation that could change the landscape for everyone involved.

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

For example, it's obvious that people are lousy savers or don't understand investments and, therefore, will never save enough for retirement.

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

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

Disenthrall. It's a great word. It means there are ideas all of us are enthralled to which we seemingly take for granted as the 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 way things were. And he was calling for a revolution, a transformation and an abolition 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 have been putting on "fiduciary responsibility, 3(21) and 3(38) programs” has done absolutely nothing to transform the failure of the 401(k) system to increase participant success.

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