A Question of Balance

The much-maligned 401(k) plan is being beefed up. So are the penalties for failing to manage it well.

Complain all you like about the 401(k) plan, but it is not going away.

True, 401(k)s have not proved to be the perfect substitute for pension plans. Workers tend not to use them to full advantage, and employers don’t always follow best practices in designing them. Participants’ account balances took a terrible beating in the market meltdown of 2008, jeopardizing the retirement ambitions of millions of aging baby boomers. When Time magazine recently devoted a cover story to “Why It’s Time to Retire the 401(k),” it may have engaged in some journalistic hyperbole, but it also captured Middle America’s growing angst over the fate of a critical long-term investment.

But there is good news: thanks to a raft of innovative new products, plan-design changes, and regulatory safe harbors, it is easier than ever to build a low-cost, high-performing 401(k) plan that gives your employees a fighting chance of achieving financial security in retirement, while simultaneously protecting you from missteps that could lead to messy and potentially expensive lawsuits. Automatic enrollment makes it easier to get people into the plans who might have neglected to join in the past. Target-date funds give them an easy way to invest in a professionally managed, diversified investment portfolio. And the Pension Protection Act of 2006, which led to the designation of certain approved types of funds as “qualified default investment alternatives” (QDIAs), offers a fiduciary safe harbor to plan sponsors, allowing them to make investment decisions on behalf of participants who don’t make them on their own.

The bad news? Get any of this wrong, and you are more likely than ever to be held accountable for cleaning up the mess. Capitol Hill and the Department of Labor are in a race to drive down fees and drive up transparency in the 401(k) market, and however noble the intentions, any new rules they hand down will create new compliance challenges for plan sponsors.

Meanwhile, plaintiff’s lawyers aren’t waiting on legislators or regulators to drive change. Over the past several years they have filed dozens of lawsuits on behalf of plan participants alleging that plan sponsors failed their fiduciary duties. Among other things, they claim sponsors paid excessive fees to service providers and populated their plans with costly and underperforming investment options. Some of those lawsuits have been dismissed, but many others are still winding their way through the courts, and at least one ended in a settlement that cost the defendant tens of millions of dollars.

Whether you’ve got front-line responsibility for your organization’s 401(k) plan or play an advisory role, here are four 401(k) trends to watch, and perhaps take advantage of, in 2010:

New Retirement Income Solutions

One of the biggest complaints about 401(k) plans is that they function purely as asset accumulation vehicles, with no mechanism for helping participants prudently draw down their savings in retirement. Over the past several years, a number of vendors have attacked this problem by introducing annuities that function as investment options within a plan.

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