401(k) Products Should Get Ready For More Changes
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Products and services available to 401(k) participants today have evolved during the past 20 years, largely through market pressure–from the participants themselves.
The changes include: expanded investment options (to eight or more, up from two); increased access to information; availability of transaction capability on a 24/7/365 basis; and increased education and investment advice (the latest product enhancement).
Going forward, the pace of change will not slow down, and it will continue to be influenced largely by participants. In short, 401(k) marketers need to start gearing up for more change.
People who disagree with that prediction say most participants are content with their 401(k) plans as they are now. But, while its true that at least 80% of participants are either content or indifferent about their plans, that is only part of the story.
Change in this equity arena has historically been driven by the more knowledgeable, proactive participants, not those who are content with what they have.
Consider why the industry moved from offering two funds to offering eight or more. That didnt happen because the vast majority of participants wanted additional options. It happened because participants who wanted more funds successfully pushed the market in that direction.
That is the pattern that will continue in the future, hence making for even more change. Following is a look at what some of the coming issues might entail, plus a review of possible solutions.
Choice and Control: People who have access to unlimited investment alternatives through their IRA and other personal investments will want the same flexibility with their 401(k) plans.
After all, someone who can select from thousands of alternatives when investing only a couple of thousand dollars outside the 401(k) has difficulty understanding why he/she is limited to only 10 alternatives when investing a much larger sum inside it.
As for the issue of control, participant demand for greater control over their 401(k) investments will rise. For several years now, employers, service providers and the media have told employees that planning for retirement is the employee's responsibility. This includes responsibility for planning how to invest retirement savings.
Therefore, when employees receive notice from their employer, to the effect that their 401(k) money is being moved from one set of funds to another, they are initially surprised and then annoyed. It suggests to them that they don't really have the control they thought they had.
Participants who have received such announcements have frequently asked me whether the employer can legally force them to move their money from one set of funds to another. The answer is yes.
