First there was paternalism. Employers starting 401(k) plans said to workers, we'll pick a few investments we like, and you can put your...
WASHINGTON — First there was paternalism. Employers starting 401(k) plans said to workers, we’ll pick a few investments we like, and you can put your money in. But many workers didn’t bite.
Next there was choice. Employers said, we’ll give you boatloads of options, and you can Take Control. Again, many workers didn’t bite.
Then there came the automatics. Employers said if you don’t say otherwise, we’ll automatically enroll you in the plan, automatically put you in a “suitable” investment option, and that may be a “life cycle” fund that automatically adjusts as you age.
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But even these hands-off features don’t get their 401(k) plans where they want them to be, a growing number of employers are concluding.
So, encouraged by a regulatory climate that appears to grant employers more latitude in giving workers advice — not to mention the specter of lawsuits by workers who claim they didn’t get help and therefore made bad choices — some companies are hiring outside experts who will offer disinterested advice and in some cases make all decisions for a worker if he or she chooses.
These employers are concluding “people aren’t changing their behavior … so let’s change the 401(k) plan,” said Jeff Maggioncalda, chief executive of Financial Engines, a Palo Alto, Calif., firm that provides account management for workers,
Companies are hiring Financial Engines and firms like it to do the investment thinking for workers who prefer not to do it themselves.
Typically, these firms are not the actual stock and bond pickers. Instead, they help guide workers in making choices among the mutual funds and other offerings in their employer’s 401(k) plan.
In the case of Financial Engines, workers can even hand over all the decisions to the firm.
Financial Engines prepares an analysis that takes into account such factors as risk tolerance and time horizon, and that also allows workers to show assets outside the plan, so that those can be taken into account in constructing a portfolio.
“For an individual, it can be totally personalized, but literally all it really takes is a signature, and they’re done,” Maggioncalda said.
Financial Engines, which contracts directly with some companies and through the Vanguard Group of mutual funds with others, has signed up more than 20 companies, with $36 billion in assets and more than 500,000 workers, Maggioncalda said.
The service isn’t free. In most cases, it is offered by the employer as an option within the plan; workers who sign up pay 0.4 to 0.6 percent of their account balance annually. This is on top of whatever fees the underlying investments charge.
But for some workers, this fee for “the choice not to have to choose,” as Maggioncalda put it, may be worth paying.
There is much evidence that 401(k) plans will work for employees who invest wisely, faithfully and over many years. But there is also much evidence many workers don’t.
Automatic enrollment for new workers, which the Internal Revenue Service recently endorsed, can help with the time element.
And advisers like Financial Engines may be able to help with the wisdom part. For instance, it will limit workers to holding no more than 20 percent of their accounts in the stock of their employer, unless they insist on owning more.
But if workers don’t make enough to invest significant amounts, or if they spend their account money when they change jobs — as many continue to do — or if the markets go into a prolonged slump, a lot of people are going to find their retirement years threadbare, at best.