Dan Helman, team leader of retirement services of BHP Billiton’s North American operations, knew that the change he was making to the company’s 401(k) plan would be perceived by some as risky, but he felt certain that it was the right thing to do.
Starting last fall, the mining resources company began automatically enrolling its 1,800 salaried employees into a managed account program. Under the plan, workers paid Financial Engines, a San Mateo, California, financial advice provider, to invest and oversee their 401(k)s for them. The fees for the advice were automatically deducted from the employees’ 401(k) accounts unless they opted out of the feature.
"Many companies are nervous about doing this because the Labor Department hasn’t given its blessing that automatically enrolling employees into a managed account program is all right," says Alicia Munnell, director of the Center for Retirement Research at Boston College. "If something goes wrong, they don’t have that sanctioned official blessing that they aren’t responsible."
A growing number of employers with 401(k) plans, such as J.C. Penney and Motorola, have begun offering managed account programs to accommodate employees’ desire to have someone else choose and manage their investments for them. However, only a handful have done what BHP did by making managed accounts the default investment for automatic enrollment.
More than half of employees surveyed by the Employee Benefit Research Institute and Mathew Greenwald & Associates and they would be somewhat or very likely to stay in a 401(k) plan if automatically enrolled.
|Source: Employee Benefit Research Institute and Mathew Greenwalds & Associates' 2005 Retirement Confidence Survey|
The main concern that employers have is that these programs come with added costs. On average, managed account programs cost 0.15 percent to 0.3 percent. Those expenses, which are paid by the employee, are added to the expenses an employee already pays with a 401(k) account. So if an employee pays 1 percent in 401(k) account expenses, that employee could pay up to 1.3 percent for the managed account.
Motorola, which began offering managed accounts last year through Financial Engines, has decided for now against automatically enrolling employees into its managed account program because of the added costs. "If we did it, we would enroll them into a managed account and make the first 90 days free," says Randy Boldt, director of global rewards at Motorola. "The employee would get three notices to make sure they were aware of it."
Laurel Cochennet, a retirement consultant at Mercer Human Resource Consulting, says that more companies will follow in BHP’s footsteps once the fees for managed accounts go down. "As it becomes a more established service and usage goes up, I am hopeful that the providers will be able to reduce the fees," she says
But Helman is convinced that the extra expenses are worth it because employees are getting professional money management expertise. He says that offering managed accounts is a way of providing 401(k) plan participants with the same kind of professional financial management that they may get through a defined-benefit plan, but in a much more transparent way.
To make sure that its employees understood the process, BHP held face-to-face meetings and put out communications about the program and its fees, which total about 0.1 percent to 0.5 percent, depending on the amount of money in the employee’s account. The bigger the account, the lower the fees, he says.
Helman says that using managed accounts as the default option actually makes the investment process clearer than the default option most companies are using: the lifecycle fund. Such funds rebalance the assets into more conservative investment choices as the employee approaches retirement.
"With lifecycle funds, people don’t understand or get to see the process in the way they do with managed accounts," Helman says.
Also, many employees don’t invest in lifecycle funds properly, Boldt says. They only serve their intended purpose if employees invest their entire 401(k)s into them. A recent Hewitt Associates study, however, showed that only 13.2 percent of employees invest in a single lifecycle fund.
Still, not everyone agrees that managed accounts are the solution. "The problem with managed accounts is that the fees tend to only be worth it if you are getting a lot of feedback from the employees," says Michael Weddell, a retirement consultant at Watson Wyatt Worldwide. He says that companies need to get such information as the employees’ age and planned retirement date to really make managed accounts achieve their best result. "If you don’t get that, you are going to have a hard time explaining why these are better than the less expensive lifestyle funds," Weddell says.
Workforce Management, August 2005, p. 52 --Subscribe Now!