401k Plans: Manage Your Own?
Strategic Finance Magazine On self directed retirement plans for Strategic Finance magazine

News- economics and investments

Manage your own retirement plan


1 July 1999
Strategic Finance


The best way to make money is to do it yourself. On the other hand, the best way to lose money is to do it yourself. Many people believe if they can manage their own retirement accounts, they can become millionaires. It's not as easy as it looks.

According to latest U.S. Department of Labor estimates, 65 million Americans are currently eligible to participate in 401(k) plans, and this number is rising. Employees like putting money away for retirement through a 401(k) plan, especially with an employer's partial match. But many employees aren't very happy with their plans because they offer only a meager group of investment choices: a stock fund, a bond fund, the employer's stock, and a money market fund.

In today's environment, with so many of us talking about how well our investments are doing, such a limited choice of investment options doesn't sit well. Many participants want more freedom, and that means more choices. They want to choose investments rather than accept their employer's options. In response to this development, an increasing number of 401(k) plan sponsors are giving their participants what they want-a self-directed brokerage account (SDBA). An SDBA allows an employee to choose any eligible investment and to trade it at any time, through a broker.

David Wray, president of the 401 (k)/Profit Sharing Council, an educational and training organization based in Chicago, says the self-directed brokerage option is now offered by 9.4% of the plans surveyed in 1997, up from 4.4% in 1990. According to Smart Money magazine, however, only nine companies out of the 96 largest 401(k)s have a self-directed brokerage option. The nine are Hilton Hotels, PepsiCo, Chevron, Amoco, Sears, Tricon Global Restaurants, United Parcel Service, Walgreen, and Xerox.

Many employers have decided to take the SDBA approach because of the insatiable demand by plan participants for new funds. Plan sponsors, according to Wray, "figure it's easier to offer a self-directed brokerage option than it is to keep adding new funds to the menu of investment choices offered to plan participants."

Mary Willett, director of supplemental retirement plans for the state of Wisconsin, shares this view. Willett explains that the Wisconsin plan for state and local government employees is broad based-it offers 13 investment options. Each investment option has been evaluated by the state and found suitable. But participants keep asking for more investment choices. Says Willett, "Many of the funds that some of our participants want to invest in are high-risk investments that aren't suitable for most employees. So to make such funds available without `cluttering up the core,' our board has tentatively selected Charles Schwab to offer a self-directed brokerage option to employees who aren't satisfied with our core program. We are still working out all the contract details."

Bruce Fenton is the president of Atlantic Financial investment firm, an Internet-based supermarket of financial products (http://www.af.com). He says, "401 (k) plans that allow participants to have a Self-Directed Brokerage Account (SDBA) are definitely on the rise." As Fenton describes it, "With some SDBA plans, the participant feels as if he's got an IRA Account-the investment choices are almost unlimited."


An SDBA is a powerful tool in the hands of employers trying to attract and retain good people by offering plan participants greater investment flexibility, enhancing the attractiveness of already popular 401(k) retirement plans. An SDBA plan gives more experienced 401(k) participants "a way to diversify within their 401(k) plan," said David Peckman in describing the "Personal Choice Retirement Account" offered by Charles Schwab and Company. Peckman is president of San Francisco based 401(k) Forum, which bills itself as "The first online investment advisor serving the needs of 401(k) participants." It can be found on the Internet at www.401kforum.com/.

Fees for individual participants in Schwab's SDBA average around $200 the first year and about $100 in subsequent years.

Employers offering an SDBA typically require plan participants who elect to exercise this option to pay whatever added costs are associated with it. Says Fenton, "That way, employees who don't want an SDBA don't have to shoulder the expenses of employees that do:' Some employers who offer SDBAs limit the number of mutual funds participants can invest in. Ditto for listed stocks and bonds. Profits aren't guaranteed. In 1995, the 401(k)/Profit Sharing Council reported self-directed brokerage accounts underperformed the S&P 500 on average by more than 10%.

Many employers are concerned about offering too much freedom to their plan participants. They don't want their employees making highly speculative investments in their 401(k) plans. Their attitude is something like: "I'm providing you with a 401 (k) plan to help you fund your retirement, not to do day trading:" If an employee invests his/her entire 401(k) account balance in a speculative stock that takes a steep nosedive, it's a public relations disaster for the employer and a financial disaster for the employee.

William J. Metzer, CEO of Assets Unlimited, Inc., in Campbell, Calif., warns against trying to actively beat the market or outsmart professional mutual fund managers. "You would not try to remove your own appendix. Why try to invest your own retirement money?" Still, about 30% of his customers use some form of self-directed accounts. Technology makes it easy to have self-directed accounts, but it doesn't make investors more market savvy. Computers don't ask Why?" Participants can be attached to a stock or put all their investment eggs in one basket, ignoring the benefits of asset allocation, according to Metzer.


As plan sponsors increase the number of investment options available, many plan administrators are also offering their participants basic investment education programs to help them make sound investment decisions. A recent survey found that some 75% of 262 mid-sized and large companies polled currently provide investment education programs to workers-up from 44% in 1993.

Laura Jacobs, Certified Financial Planner for Waddell & Reed in Santa Clara, Calif., believes self-directed accounts will have a big impact on 401(k) plans over the next several years. The rising stock market over the last five years seemed to make it easy to invest safely. She points out participants need to be educated and work with a good planner or broker to help them during the rough times. These would-be investors must develop the self-discipline not to panic during market downturns that inevitably will occur. For many, the best strategy for 401(k) retirement accounts is still buy and hold.


Many 401(k) plan participants enjoy receiving a "menu" of mutual funds and other investment options that come with the SDBA option, but some don't. Some employees can find investing for retirement quite confusing and long for the simplicity of bygone days when employers handled all retirement investments and offered their employees a pension that was based on length of service and average salary. Unfortunately, those days are gone. The size of an employee's retirement fund will mostly depend on what investment decisions were made during his/her working years.

Plan participants who lack the investment expertise to use the varied menus that come with the SDBA option may be candidates for the 401(k) "Wrap" account. A Wrap account is a brokerage account with a twist. The account holder pays an annual fee that covers everything: investment advisory services, portfolio management, advice on selecting other investment advisors, and the execution of all client transactions. The annual fee paid to the brokerage firm is a percentage of assets in the account. It can range from 1.5% to 3%. Mutual fund Wrap accounts, for individuals whose portfolio consists of mutual funds only, are rapidly gaining in popularity. The broker helps select an advisor to manage the mutual fund Wrap account. The advisor evaluates the client's financial goals and risk tolerance and then selects an appropriate mix of mutual funds for the client. One fee covers all services provided within a mutual fund Wrap account.

A recent report on such accounts by Cerulli Associates, a Boston investment consulting firm, says that mutual fund Wrap account assets make up 11% of total Wrap assets under management, with $12.4 billion of assets. Cerulli estimates that there are $117 billion of traditional Wrap account assets under management.

SalomonSmithBarney (SSB) is a major player in the 401 (k) Wrap business. SSB has aggressively marketed its mutual fund Wrap programs, especially one called TRAK, to 401(k) plan sponsors offering an SDBA option. TRAK offers participants access to 14 strategically selected investment portfolios that encompass a wide range of investment styles. Professional money managers, who may ordinarily serve only institutional investors with deep pockets, manage the 14 portfolios. This may suit the universe of 401(k) plan participants who lack investment savvy. SSB also offers a Wrap program that employs no-load mutual funds. The fees charged range from 1% all the way down to 20 basis points, depending on the number of plan participants and funds to be invested. Both Wells Fargo and Prudential also are major players in the 401(k) Wrap program market.

Tom Greeves, a Certified Financial Planner with Windsor Asset Management in Bethesda, Md., says "High fees are a potential stumbling block for 401(k) Wrap programs, but, for my money, I'd rather pay a high fee than make 'dumb' investment decisions on my own." Gary Pittsford, an advisor with Crosspoint Consulting in Indianapolis, Ind., agrees. Pittsford says, "Fees are coming down for Wrap accounts-and that's good. But for an investor in a 401(k) plan who lacks investment expertise, investing without advice isn't good. The 401(k) plan participant should look for the best deal he can find, but investing without professional advice is dumb." Terri Balding, a Certified Financial Planner with Harbour Investments in Madison, Wis., observes, "Every investor needs an investment program tailored to his needs. The `one-size fits-all approach' doesn't work. You need advice." Wrap accounts can provide the vast majority of 401(k) plan participants with sound professional advice that will enable them to invest wisely and save for a comfortable retirement.


Cost is the primary concern for plans offering the SDBA option. Offering participants the SDBA option will increase plan sponsor expenses. According to Fenton, "The least expensive plans are those with few bells and whistles. A plan that offers the SDBA option has to cost the plan sponsor more." One way around this potential deterrent is to require plan participants who elect to use the SDBA to shoulder the full cost. Fenton says, "There has been little resistance from employees to this approach. Employees recognize that they've got to pay to win."

Many administrative costs and problems will be reduced as interest increases and technology improves. Most participants cannot obtain higher returns on average than with a good mutual fund manager. Self-directed plans can be more expensive and time-consuming to administer for both participants and plan sponsors. Nevertheless, don't count them out of the market.

Gregg Rose is a Silicon Valley-based financial analyst with a background in investment performance analysis, compliance auditing, incentive compensation, and employee benefits. He can be reached by phone at 415-974-9804 or via e-mail at Gregg_Rose@hotmail. com.

Contributor: Milton Zall is a freelance writer based in Silver Spring, Md., who specializes in taxes, investments, and business issues. He is a Certified Internal Auditor and a Registered Investment Advisor. He can be reached by phone at 301- 649-6044 or via e-mail at miltzall@pop.dn.net.

Copyright (c) 1999 Bell & Howell Information and Learning Company. All rights reserved.

written by Gregg Rose
Strategic Finance, Volume 81, Issue 1