401(k)s Are Still O(k)

It is great to see Elmer Rich once again weighing in on the subject of the 401(k) market. He is very active on LinkedIn and other blogs on the retirement market. I knew that it would only be a matter of time for someone who clearly has made a career of supporting the status quo to step up and defend the conflicted and self-dealing businesses currently controlling the retirement plan market. I have had the pleasure of online debates with Mr. Rich on several occasions and have attached one link that gives a good example of his opinions on one of the 401(k) market issues, which addresses disclosures. His theme and opinions are clearly repeated in the following post: http://www.linkedin.com/news?viewArticle=&articleID=136033380&gid=1777965&articleURL=http%3A%2F%2Fmoneywatch.bnet.com%2Fsaving-money%2Fblog%2Fdevil-details%2Fsenate-moves-to-keep-401k-fees-hidden%2F2301%2F&urlhash=zfZA&trk=news_discuss Before addressing Mr. Rich's comments, I would like to express my appreciation to Financial Advisor magazine for the time they spent with us and their efforts to identify some of the significant issues currently being addressed in the retirement market. I would also like to thank Michael Case Smith, Managing Director of Avatar, who has done much of the heavy lifting in Washington DC and has done an excellent job in representing Avatar before several prestigious governmental committees. With respect to my remark about 401(k)s being broken, this was a reference to the fact the industry had been unable to influence, in a meaningful way, the three main driving components for a successful retirement plan, i.e., participation beyond 70%, savings rates to an average above 10% and adequate diversification. These issues were researched, papers published and conferences held. However, after almost three decades, it was clear that the education only solution had failed to make substantial progress in getting the participants to use the 401(k) plans to meet their own personal retirement objectives. I am on record concerning each of these issues. I was a principal of the Tarbox Group, which did the detailed research completed over a five-year period relating to participant behavior, specifically addressing participants' lack of engagement in making investment choices and understanding how to improve participation and increase savings rates . The results of this research were shared with Richard H. Thaler of the University of Chicago and Shlomo Benartzi of the University of California, Los Angeles. This resulted in the publication of "Save More Tomorrow: Using Behavioral Economics to Increase Employee Savings". http://economics.uchicago.edu/download/save-more.pdf These findings greatly contributed to the passage of the Pension Protection Act of 2006, which I stated was ".....a tremendous step in the right direction...." However, I did go on to say, "...a lot of things still need to be done." Here I was referencing the need to remove conflicts of interests and self-dealing by parties of interest. I requested and received an Advisory Opinion 2009-04A http://www.dol.gov/ebsa/regs/aos/ao2009-04a.html requesting clarification as to if a conflicted party, in this case, a mutual fund company, could engage in a prohibited transaction, i.e., self-dealing through the creation of a tiered mutual fund or target date fund. Although the Department found that the mutual fund company does have an exemption to self-deal, a privilege not offered by the way to any other advisor or service provider in an ERISA plan, the Department did state that this exemption "......does not apply to a plan fiduciary's decision to invest plan assets in a mutual fund." In other words, the mutual fund company is permitted to self-deal, but the fiduciary, i.e. the plan sponsor, will have to show prudence as to why they engaged a conflicted service provider. Although the terms "plan sponsors and participants" may not have shown up in the article, Mr. Rich is well aware that my efforts are specifically focused on increasing protections to the plan sponsor and providing the participant with the best non-conflicted low cost solutions available. Mr. Rich also often asks for research and facts. Here is one that should pretty much give you an idea of where his interests are based. From the home page of his website: http://www.richandco.com. We serve: - Schwab Investment Advisors - Fidelity Investment Advisors - TD Ameritrade Investment Advisors Interestingly, I do not see the terms participant or plan sponsor.

This article is typically misleading. Surprising to find it in an industry magazine. But everyone is piling on the "beat-up 401(k)s" train. The title implies "maybe" the 401(k)s are "OK" then proceeds to detail the ways they are and have been "broken." The editor and journalist are just playing to popular prejudice. Once again, all sorts of vague claims, opinions and observations claims and not one piece of evidence. How do editors tolerate this? Wouldn't it be nice if someone (realistically)portrayed and defended the 401(k) system -- as it currently functions (very well) without trying to sell something at the same time!? "I think 401(k)s were broken, and they've been partially repaired," Medin says. "The Pension Protection Act was a tremendous step in the right direction, but a lot of things still need to be done." Then He/the journalist/editor proceed to list his offerings throughout the article. Ho hum. We did a "word-cloud" (does a graphic of the simple word count)of this article, it's posted at link below. The main words are Avatar, funds, target-date, fund, etc. The words participants, plan sponsors, etc don't show up. Hmm? http://scr.bi/dFqaqo That pretty much tells the priorities of the article. "Broken!?" aside from a sales tactic -- where is the data and evidence of this? Fiduciary practices require disclosure of material benefits -- how about in public pronouncements and articles? The pretty much universal media anti-401(k) campaign is all so ad hoc, off the cuff and sales oriented. This is sales 101 tactics -- create the need by reference to tangential experiences that trigger uncomfortable emotions the sales person can then offer a solution (sort of). "The sky is falling!!" "Want to buy this helmet!?" The 401(k) system is "broken" -- "Want to buy my fix -- for your plan -- right now." Here's the media environment we're in. The financial system "melted down." Real pain, fear, anger,sadness, etc was experienced globally and in the US by people getting close to retirement. Nothing to do with 401(k)s -- to the contrary. The fear, frustration and anger from THAT Meltdown experience have been, cleverly but dishonestly, played upon to globally and remorselessly criticize the 401(k) system to sell stuff. It's a very effective and time-honored tactic. We are not against anyone selling their solutions or media producing articles and headlines that get the most attention and flatter firms -- to the contrary. We're paid to market and sell our client's offerings ourselves -- that's how we make money and our disclosure. However, if we are serious about the word "fiduciary" in our professional behaviors we need to deal more with facts and have some professional detachment from pop (mainly negative and selling) emotions -- of the moment.