The Barker Portfolio: How Much 401(k) Choice Is Healthy?

Some plans allow employees to stray from company-picked options. For many, that's a good idea

By Robert Barker

Do the choices in your 401(k) plan confuse you? Many people, maybe most, feel that way. But not all, and if you're one of those focused retirement savers who crave more control over how your 401(k) is invested, odds are improving that you soon will get your wish.

More and more employers are including something called SDBAs, or self-directed brokerage accounts, as an option in their 401(k) plans. Also known as "windows," they permit employee-investors to reach beyond the 12 or so investment choices offered in a typical 401(k) to pick from the thousands of mutual funds--and sometimes even individual stocks and bonds--that are generally available. United Parcel Service's 72,000 nonunion employees, for example, get this sort of choice in their UPS Savings Advantage plan. Discount broker Charles Schwab says 70% of the new plans it sets up for employers include a window. At 401(k) giant Fidelity Investments, it's about half that. By next year, more than one-fifth of all 401(k)s are expected to have SDBAs (chart). Eric Schneeman, CEO of plan tracker Search401k, says: "It's a growing phenomenon--dramatically so."

CLASSIC NOSEDIVE. But is it a good thing? Lots of experts are raising an eyebrow, including some who build SDBAs into plans. "I'm very skeptical that I'm giving a good tool to someone who can use it well," says Dan Carlson, vice-president for retirement plans at Delaware Investments, which manages $80 billion in assets. Scott Lummer, chief investment officer of 401(k) advisory service mPower, told me his firm recently signed a new client after four of its employees saw their 401(k) brokerage balances, all in a single stock, go poof. They had bought the stock, Premier Classic Art, on a tip as it zoomed in the summer of 1999 above $10. Only later, Lummer said, did they learn that trading in the stock had been manipulated. It now trades around 25 cents.

Those risks exist. Yet I won't wag my finger and warn anyone away from taking more responsibility for their 401(k). In fact, I think most plans ought to offer windows. For one thing, rules governing individual retirement accounts have long allowed self-directed brokerage options. I'm sure some investors have hurt themselves this way. But people can help themselves, too.

John Greaney of Houston is one such guy. An engineer with an MBA from Syracuse University, Greaney job-hopped his way through the 1980s as he pursued his dream of retiring early. He saved like mad, and each time he left a job, he rolled his company retirement plan balance into a self-directed IRA. Single, without kids, Greaney retired in 1994 at age 38. Two years later, he began posting what he had learned about retirement investing at Sure, he told me, self-directed accounts can be a danger. But "anything that gives a person flexibility and the ability to seek out lower prices is a good thing." Over years, high fees on investments can cut deeply into your compounded savings, so an SDBA can help active investors seek lower-cost choices.

What's more, for all the worry over employees' ability to pick investments, there's little evidence that employers, particularly smaller ones, do much better. Benefits consultant Ted Benna is the man who invented the 401(k) 20 years ago after spotting a loophole in the tax code. Most employers, Benna has concluded, are not qualified to "pick the funds that employees are going to be putting their money in." He recently watched as executives responsible for a $30 million plan nixed a highly qualified investment firm because it had sent only women representatives to pitch the firm's services.

To help fix the problems that have grown up with his brainchild, Benna is pushing a broad scheme for reforming 401(k) policy. It focuses on what most people need and want--easily understandable investment options that can be chosen without much fuss. Yet Benna's plan also allows a mutual-fund window, stopping short of permitting stock and bond trading. It's only fair, he told me, for those employees who say: "Hey, look, it's my responsibility. It's my money. Why don't I have the same alternatives in my 401(k) as outside my 401(k)?" Exactly right.

Barker covers personal finance for BusinessWeek from Melbourne Beach, Fla.

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