After rolling out Web sites designed to help 401(k) participants navigate their investment choices, corporate plan sponsors are coming to terms with an unpleasant realization: Most people don’t use them.
Recent research by Greenwich Associates reveals that only 35% of defined contribution plan participants use the 401(k) Internet information tools provided by their companies at all, and according to the estimates of executives at midsize pension funds, the number using them to their full extent seems to be a fraction of that. In part for that reason, the proportion of midsize companies offering investment advice via the Internet fell to 43% in 2003, from 55% the year before. Companies that forgo the Internet face a serious dilemma, however: How else can they provide their plan participants with the tools they need to make informed investment decisions, without breaking the bank in the process?
“Working through an Internet questionnaire requires a degree of financial know-how and patience that only a relatively small percentage of 401(k) participants possess,” says Greenwich Associates consultant Chris McNickle. “Even participants who do use the online questionnaires would rather make their investment choices based on in-person advice than on the basis of a computer’s recommendations.”
The low usage rate for 401(k) Internet education and advice tools is just one of the challenges facing midsize U.S. corporate pension funds. Greenwich’s new research also analyzes another issue of key importance to the 900 funds surveyed in 2003: the mutual fund investigations. The results of this research are detailed in a new report from Greenwich Associates, which also examines market trends like the unexpected stall in the adoption of cash balance plan structures.
The failure of the Internet to meet the needs of defined contribution (DC) participants to the extent promised just a few years ago poses a major financial hurdle for plan sponsors and service providers. As the use of defined benefit (DB) plans declines among midsize companies – from 49% of these companies offering DB plans in 2002 to 43% last year – DC plans are becoming ever more important to companies and employees.
With so many employees relying on DC plans, plan sponsors have recognized the importance of providing their participants with both investment education and advice. While a full 29% of companies reported providing only general investment education – without specific investment advice – in 2002, that number shrunk to just 14% last year.
Currently, about 30% of midsize companies provide advice via human representatives, with roughly 12% offering telephone service and 19% offering seminars or face-to-face service. But whether personal service is provided over the phone or on-site, “either way, the economics just don’t really work out,” notes Greenwich Associates consultant John Webster. With the average 401(k) account today worth around $40,000, service provider fees in the range of 1% generate just $400 a year, which must cover investment management, administration, and quarterly participant statements. “That doesn’t leave a lot for the compensation of those phone counselors or in-person advisers,” he says.
A Greenwich Associates survey of 131 large U.S. institutional investors reveals that executives at 60% of these institutions see controversial trading practices as widespread in the industry, and not just the actions of a few mutual fund companies. Almost 60% of the institutions responding to Greenwich’s online survey use a mutual fund firm currently under investigation for improper trading practices. These funds indicated that the ongoing scandals were eroding their confidence in the mutual fund industry. In the new report, the consultants at Greenwich Associates offer suggestions to mutual fund companies for restoring that trust, including the establishment of more independent boards and the implementation of “fair value” pricing.
The number of midsize companies using cash balance plans continued to rise in 2003, despite a July ruling by a federal judge that brought the overall growth of cash balance to what Greenwich Associates believes will be a temporary halt. The use of cash balance plans among both midsize and large companies increased sharply in the early part of last year. Among midsize firms, the overall proportion of companies using the plans rose from 4% to 6%. At very large corporations – those with pension assets exceeding $5 billion – usage jumped from 31% to 39%. Although many corporations planning a shift to cash balance have now hesitated, the potential advantages make it unlikely that the interruption will be permanent. But as Greenwich Associates consultant Chris McNickle notes: “Conversions pose ethical as well as legal challenges to which corporate managers must certainly be attentive.”