Corporate Sponsors Agree: 401(k) Plan Results Don't Matter
"As long as your process is good, your results don't matter!"
It's Sunday March 2, 2008 and here we are at the Pensions & Investments Defined Contribution Conference-East Coast held in Palm Beach Gardens, Florida. We've been invited to speak at a two-hour closed-door session entitled, Fiduciary Governance Workshop limited to plan sponsors only. For two o'clock on a Sunday afternoon at a major golf resort with the Honda Classic in progress, the two-hour session is well-attended. One sponsor remarks before we get started that she found this session at last year's conference the most informative of any because sponsors were given the straight scoop, as opposed to being sold product by investment firms underwriting the conference.
The purpose behind our agreeing to speak at the conference was to shake the plan sponsor audience out of its complacency, providing a counterpoint to the defense lawyers and industry participants that had been telling sponsors all the recent uproar about 401k mismanagement was much ado about nothing. Over a dozen lawsuits had been filed against the largest 401k plans in America; members of Congress have been investigating 401k plans; the nation is awakening to the fact that these plans are failing to provide retirement security. But these issues did not appear on the agenda of this conference.
Here's the scene: Four panelists. We're 35 minutes into the two- hour program. The other three panelists have been chatting about "the importance of process." The panelists are supportive of each other and build upon each other's comments. There have been no disagreements, no debate up to this point. "Keep your plan records in a three ring binder. Give a copy to any new fiduciary board member." This is the meat of the advice that's been given. Finally the group reaches the conclusion they've been skirting around for over a half hour. Somebody said it and before you knew what was happening there was a consensus: "As long as your process is good, your results don't matter!" Eureka!
This was our wake-up call. Time to shake things up.
"Results don't matter? You've got to be joking! That's just dead wrong. You will be judged by your results. If you sit idly by as the participants in your 401k plan consistently fail to achieve any semblance of retirement security, you will be challenged, regardless of how many highly compensated advisers you have consulted in connection with your process."
This is Enron all over again. Enron had plenty of Wall Street investment firms, expensive law firms and accountants advising the corporation. But the corporation was not managed consistent with its stated objective.
"If the results achieved by the retirement plan are not consistent with its stated objectives, then the fiduciaries to the plan will be called upon to defend themselves. To be sure, if you have a great process, you will be able to refer to it in your defense. But wouldn't it be better to continuously improve your plan steering it ever more precisely toward the achievement of its stated objective and thereby avoid a lawsuit altogether? This is the path we would advocate.
The first landmine plan sponsors must avoid in travelling down this road is their own arrogance. All-too-often (and it really is human nature), once plan sponsors have made decisions regarding their plans, they revert to (1) defensiveness; (2) secrecy; and (3) arrogance. 401k fiduciaries must be aware of, yet ignore, their human nature when it conflicts with the interests of plan participants.
Defensiveness: Once decisions have been made, plan sponsors conclude they know all they need to know and that is the attitude they project to the outside world. They cease to be interested in learning more or hearing perspectives that challenge their decisions. This we refer to as the "bunker mentality" that sets in.
Secrecy: Inside this "bunker," what sponsors are doing is nobody's business-not even plan participants necessarily. The sponsor will unilaterally determine how much information participants will be provided and non-disclosure will be defended as being "too confusing" to investors. In our opinion, only plans with something to hide need be secret with respect to their operations. And there is no excuse for keeping information from participants ever. After all, it is their money.
Arrogance: Anyone who challenges the plan sponsor is viewed dismissively. Sponsors generally develop a very dangerous sense of partnership or community of interest with their advisers/vendors, relying upon them for supportive, self-serving information. Why did the plan choose high cost mutual funds? Ask the investment consultant (who received compensation from the mutual fund company) and the mutual fund company itself to prepare the proper response for the paper trail.
Now, if 401k plan sponsors had truly found a way to meet the stated objectives of these plans, i.e. providing for the retirement security of their participants, these attitudes might be justified. However, like researchers still seeking an undiscovered cure for cancer, after having spent billions, any information that might lead to a solution deserves to be heard. There is no room for arrogance with respect to 401k plans because, as they exist today, they are a dismal failure.
It's absurd to continue the pretense that these are "retirement plans" at all. These plans should not, cannot, must not, be relied upon for retirement security. They may provide some income during retirement but only a small portion of what will be needed. Unless, of course, you die real soon after retirement-like within a year or two.
Our message for this audience was to roll up their sleeves and get serious about the business of fixing the nation's 401k plans. What we're doing today is not working and has not been working for the past 30 years. The Baby Boomer retirement planning wreckage which daily is becoming more apparent could have been avoided. These plans are too expensive, have lousy investment performance, are subject to undisclosed conflicts of interest and provide only for the retirement security of the nation's money managers. We can and must do better.
Setting Standards For The Investment Management Industry
