LAST MONTH, I described a conflicting view of 401(k) plans-—with some seeing them as savings plans funded and invested by employees, and with others seeing them as retirement plans subject to legally required employer oversight. The first group I labeled as a “red state” (of mind), the second group as the “blue state” (of mind)-—obviously, a play on the current media labels for Democrats and Republicans.
However, my purpose was not political. Instead, it was to contrast the culture of individual responsibility (the red state) with the philosophy of community (the blue state). The red state approach holds that individuals should be responsible for their own planning, savings, and investing. In other words, they should be able to operate largely as a complete economic unit without much help or involvement from their employers. Under the blue state approach, responsibilities would be allocated among the members of the “community”; employers would automatically enroll their employees, investment professionals would design solutions like age-based funds of funds, and employees would assert control only where they wanted to.
Ultimately, which philosophy would prevail? No one knows, though my educated guess is that there will be some blue winners and some red winners, but that does not mean that the answer is purple. Instead, it means that specific blue concepts will work for many, perhaps most, employees, while red ideas will work for others. As a result, 401(k) plans will need to offer features for both.
I believe that Americans will insist that, as a country, we offer plans that can, and do, operate successfully to provide adequate retirement benefits when coupled with Social Security. At the moment, that is not happening-—because 401(k) plans were poorly designed for that purpose.
However, recent changes such as automatic enrollment and safe harbor investing, coupled with the advent of things like easy enrollment, annual increases in deferral amounts, and lifecycle funds, show how the speed of change is accelerating. This is a big change, in perspective, fact, and law; and we are only part way through the evolution.
On the other hand, all of the traditional features will continue to be available, and popular, for 401(k) plans—-and, in all likelihood, more will be added in the future. Plan sponsors and fiduciaries probably will continue to offer a much wider range of investment alternatives than is necessary to satisfy the law’s requirements. That would include a robust lineup of prudently selected mutual funds, as well as mutual fund windows and individual brokerage accounts. Of course, all eligible employees, including those who are automatically enrolled, will have the alternative of withdrawing from the plan entirely or of individually customizing their 401(k) experience.
All in all, I think that we are headed in the right direction. Employees will start out as participants inside the plan, rather than starting outside the plan, as a consequence of automatic enrollment. Because they are in the plan, employees will be saving and learning about investing, and they will be accumulating retirement benefits. They also will be given the right to make fundamental choices: to be in or out of the plan; to be in the plan, but to have the savings and investing managed by other members of the 401(k) community; or to be in the plan and to manage the investing and savings as an individualist.
What should plan sponsors do? Take advantage of the opportunities to enroll automatically and to use safe harbor investments. Work with the plan’s providers to offer fundamental choices. Keep abreast of the latest changes in the law, in investments, and in plan services. We are in an evolutionary period, and plan sponsors need to be aware of the changes so that they can keep up with the evolution.