El creador del plan 401(k) ofrece consejos contundentes para los asesores y los patrocinadores del plan
Speak to Ted Benna, and you might note a certain sensibility and savvy about today’s financial environment – one that places him in a rarefied league of industry thought leaders.
Benna is also legendary for his role in creating the first 401(k) savings plan. It was the early 1980s, and Benna wanted to use opportunities presented by the 1978 Revenue Act to develop a plan that would allow employees to contribute pretax dollars that could be matched by employer contributions. Excited, he pitched the concept to a client…
… and they said no.
Undeterred, Benna adapted the pitch for his then-employer. He knew the idea was sound, but “I was out there, in front, with no legislative support.”
He lobbied the Treasury Department to include provisions in their planned regulations for matching employer contributions and employee pretax deferrals. The agency included both options, which motivated previously reluctant companies to jump on the 401(k) bandwagon.
“There’s a myth that we once had a wonderful retirement system where everyone had a pension and was taken care of, and now it’s all screwed up,” Benna says. But, he adds, life before 401(k)s wasn’t exactly a utopia.
“It was nasty and ugly,” says Benna. “Employees who were covered by a pension plan typically had to stay with the same employer until age 60 to collect, or they got nothing. Some companies made it a habit to get rid of people who were about to collect their pensions. And not even 50 percent of the private work force had pensions.”
Thanks to 401(k) plans, many of the employees who have retired in the past 10 to 15 years are, today, better off than they would have been without a similar plan. And for those who spent a lifetime working for large employers, there’s supplementary income from Social Security, pensions and retirement plan balances.
Today, cumulative 401(k) plan assets are in the multi-trillion dollar range -- yet Benna asserts that, if he could do it over again, he would erase the way these investment products are currently used in plans, instead returning to his idea’s simple origin and structure.
Surprised by the bluntness? Don’t be – he’s just getting started.
Don’t want to get sued? Don’t break the rules.
Here’s an example: Benna takes an unwavering stance regarding the stream of lawsuits against companies, as well as fiduciary responsibility.
“It’s been a real long time coming,” he says. On some of the larger fiduciary responsibility cases, Benna has served as an expert witness. On one occasion, he recalls, he reviewed the board minutes for the committee overseeing the 401(k) plan.
“There were $2 billion in retirement plan assets,” Benna says. “The committee only looked at internal monthly reports showing funds gain or loss. No benchmarking or measurement. When they were discussing adding additional funds to the plan, it was pretty obvious there was a corporate connection to the funds in question. So what was their true motivation? Was it really in the best interest of their employees?”
Also on those board minutes, he says, they were “dumb enough to have start and end times of their meeting.” The annual plan review lasted only one half-hour.
“I’m not surprised those guys were getting sued,” he says.
Overall, Benna feels that the system is at odds with itself – for instance, when plan sponsors are beholden to leadership and expected to keep costs down.
“When the major part of a decision depends on saving your company money and shifting the cost to employees, you have an inherent conflict of interest,” he says.
Fiduciary rule bound to fall flat
Benna is also not overly optimistic about the Department of Labor’s (DOL) new fiduciary rule.
“It’s too draconian,” he says. “‘Big financial’ will have significant influence in the coming months. The new President will put a microscope on the regulations. They will order a delay or re-study them.”
Benna would rather the DOL modify the Summary Annual Report requirements to include a summary of provider fees and the services each provides. Although participants can request a Form 5500 for plans with 100 or more enrollees, he adds, this is not a simple process.
It’s also one of the reasons he started his new company, 401k Benna, LLC, earlier this year. The firm reviews advisor and plan fees.
Benna says the fiduciary rule and his business are inextricably linked.
“I’ve been involved with the fee issue since the DOL first started doing research hearings,” he says. “It’s been a long battle in terms of disclosure.”
The threat from above
Advisors face many challenges in today’s financial environment. But, Benna says, one of the biggest threats comes from those who want the government to handle retirement savings.
“People who hate 401(k)s have a dream that the government should run everything,” he says. “The risk to advisors is that, in this scenario, they don’t have a business.”
To thrive and survive, retirement and financial advisors must be smart, he says. “They must have a written contract with plan sponsors that identifies the services they are providing and what they are getting paid. Many advisors are operating without a contract, which is ridiculous. And because of the increasing potential of lawsuits, advisors should create records of services provided and time spent – just like accountants and attorneys.”
Benna also has advice on plan sponsors.
“Wake up and realize that many of them aren’t doing their job,” he says. “They are counting too heavily on advisors who may not be qualified. Plan sponsors need to secure professional advisors who know what they are doing and compensate them fairly. And plan sponsors should expect that a reasonable third party could look at the fees and relationship and find it proper.”
So what’s in the future?
“The next President is going to have an extremely difficult time,” Benna says of the following four years. “Both of the candidates are equally fiscally irresponsible. [To recover,] we would need a healthy economy and robust stock markets for an extended period, which is highly unlikely.”
Benna cautions that “we have milked the situation and have been punting our problems down the road. Now, we are faced with world economic issues everywhere. I know the system and the players: Talk is different than action.
“It’s a crap shoot going forward. Every retirement system – public or private, defined benefit or defined contribution – is going to be severely tested.”
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