an
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.
|
GOING AUTOMATIC
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.
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