Industry Insight from Fred Barstein
Stepping Up to Help the Participants

With 401(k) and other Defined Contribution plans so prevalent, it seems like generations ago when most of the population depended on Defined Benefit (DB) pensions.  The shift over the last 15 years seemed less problematic because it began during one of the greatest bull markets in history.  During one of the worst investing decades ever, the problems inherent with the DC system have become dramatically apparent as participants are ill equipped to take on the responsibility previously borne by plan sponsors in DB plans.  Amid the emergence of DC advisors and the recognition by politicians that there is an opportunity to both make a difference and garner attention by focusing on DC plans, the real question of who is willing to step up and take responsibility remains.

The vast majority of participants are ill-equipped to manage their personal retirement plan for a variety of reasons.  Their DC plan along with other assets have become a personal DB plan, but participants do not have the skill-set or the motivation to manage their “plan”, and most cannot afford to hire an advisor to help.  Many participants are so dismayed by their personal finances and the rocky economy that they believe they cannot bridge the gap between where they are now to where they need to be, making gap reports depressing and unrealistic. 

The behavioral finance field is considered the most progressive area of study in personal finance.  It was made popular in the DC world by UCLA Professor UCLA Professor Shlomo Benartzi, who was the inspiration behind much of what was enacted in the 2006 Pension Protection Act, using inertia to help participants make the right decisions. Behavioral finance also shows us that when participants are making such deeply personal decisions; we cannot expect them to make sane and rational decisions in their own best interest.

So if most participants are unable or unwilling to take charge of their personal DB plan, who will?  Certainly not plan sponsors, who want even less liability, work, and costs.  Providers have tried in the form of target date funds, but their bias is obvious and their solution is only a stop gap measure at best.  That leaves two other parties – DC advisors and the government.  Some DC advisors view their role as merely setting up the opportunity for participants to succeed with good record keepers, reasonable fees, and good funds; they do not take responsibility for the outcome.  Others view themselves as “success agents”, a term coined by attorney Fred Reish, judging themselves not on effort, but on results. 

In truth, for DC advisors to be truly successful they need a lot of help from their broker dealer and provider partners, incorporating behavioral finance techniques to “guide” participants to make the best decisions.  These same DC advisors need a system that tracks their success so that they can more easily distinguish themselves, not only from the blind squirrels, but also from experienced advisors who will not or cannot take responsibility for outcomes.  If DC advisors do not step up and take the lead, who will?  The answer is the one remaining party, the government.  Their help would come in the form of a quasi Thrift Savings Plan with all passive funds at seven basis points and no advisor.   This would not be good for the DC industry, or even the participants.  Just look at the Social Security system or even government pension plans to see how well governments manage retirement plans.

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