Hit or Miss

Self-directed brokerage accounts have drawn raves from some, doubt from others.

Southwest Airlines Co. CEO Herb Kelleher is renowned for his iconoclastic approach to management: He’s been known to ask prospective pilots to drop their pants during job interviews, to test their sense of humor. But his company takes employee relations very seriously. In fact, the airline’s employees are viewed as its “first customers.” So when the company’s pilots heard about some high-flying stocks and wanted a piece of the action, they got it.

In July, the Southwest Airlines Pilots’ Retirement Savings Plan began offering its participants the Schwab Personal Choice Retirement Account, a self-directed brokerage (SDB) account, as a new investment choice. Now pilots can invest a portion of their 401(k) plan account balance in individual stocks and bonds as well as in more than 1,900 mutual funds. “We ran surveys, and that’s what most people wanted,” says Richard Doherty, director of member benefits for the Southwest Airlines Pilots’ Association, the retirement savings plan’s administrator. “They weren’t satisfied with the 10 core funds we had.” So far, 550 of about 3,500 Southwest pilots have taken advantage of the brokerage option, and Doherty expects that 25 percent of the pilot workforce will sign up by year’s end.

In large part because today’s business environment is marked by a wide-ranging skills shortage–the “war on talent,” in managementspeak hyperbole–a growing number of companies are willing to listen when employees ask for an SDB option as part of their 401(k) accounts. According to a study conducted earlier this year by Cerulli Associates Inc., a Boston-based financial research and consulting firm, 14 percent of the 250 companies surveyed offer an SDB option, up from 8 percent in 1999 and 5 percent in 1998. Another 9 percent of respondents said they were planning to add the feature this year.

The growing interest in SDB accounts reflects a philosophical shift away from what’s viewed as corporate paternalism; in essence, the same impulse that led to the creation of 401(k)s to begin with reaches a new level with SDB accounts. For more than a decade, companies have been abandoning defined-benefit plans in favor of defined-contribution plans, which require participating employees to make their own investment decisions. Arguably, when an employer transfers the responsibility for retirement saving to its employees, it is duty-bound to provide them with an optimal range of choices. “Self-directed brokerage is the next logical progression in the empowerment of participants,” says Walt Bettinger, president of the Retirement Plan Services Enterprise division at Charles Schwab & Co. “It offers them broader choice. If we ask participants to be responsible for their investments, it’s only fair to give them all the necessary tools to do so.”

But not everyone favors the trend toward unlimited investment choice and unmitigated individual responsibility for retirement savings. Christopher Hobbs, CFO at Xuma Inc., a San Francisco­based E-business infrastructure and managed services provider, advises against including an SDB option in 401(k) plans. “We’ve looked at that issue,” he says, “and I specifically declined it for the simple reason that, philosophically, you shouldn’t day-trade your retirement account. This is retirement money, and it should be managed professionally.” Hobbs explains that Xuma employees can achieve potentially high returns within the company 401(k) menu, which includes a wide array of mutual funds. “If they want to be aggressive, we offer a solid selection of emerging-growth funds,” he says. “Besides, our employees are young folks, and I don’t want them looking at tickers all day.”


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