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Is it Time to Reevaluate Participant Self-Direction?

When you really think it through, changing the 401(k) investment approach from participant-directed to offering portfolios selected by the plan sponsor or an investment fiduciary has merit. It allows those who are most qualified to make asset selections do what they do best. The participant’s choices get boiled down to just a few important questions: “How much do you need to save?” “Are you aware that your employer is giving you $X for every dollar you contribute?”

By choosing to eliminate participant self-direction, it seems the plan sponsor, in most respects, does not significantly increase its liability. Why? In order to obtain full protection under ERISA 404(c), there is still an obligation to select appropriate funds. If the same due diligence, or even lack thereof, is performed, isn't sponsor liability about the same?

As a pension geek, I actually read the DOL's proposed participant disclosure regulations, including their economic/impact analysis. If memory serves, the DOL estimated that these regulations would benefit 29% of all participants. As I quickly utilize my abacus, this tells me, even if DOL's estimate is correct, 71% of the 401(k) population will be left to their own devices. This is hardly a rousing endorsement of investment self-direction.

Now we get to time and expense. We have all painfully learned that no matter how well intentioned (if 29% benefiting is “well intentioned”) participant investment disclosure was, it was met by participant yawns and vendor expenses — especially when we consider the mounds of material that were required to be delivered, call centers that were staffed and electronic delivery constraints. If the investments are not self-directed, then all the participant investment disclosure rules and the paper on which they are printed disappear. (For those who like disclosure requirements, you need not fret. Running a qualified plan still offers ample opportunity hand out material.)

Lastly, wouldn't having to spend as much time with participants leverage an advisor's ability to appropriately service more plans? It would also save a lot of trees, and very likely bolster our country’s retirement security.

Jim Farley, CPC, QPA is the Managing Member of James Farley, LLC an independent firm specializing in business development, technical expertise, intellectual capital, targeted presentations and qualified plan and IRA consulting.

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