The Key to Safe Retirement Plans: Choice

A new Schwab study suggests that giving employees more options for their savings is the best way to protect assets

By Robert Barker

As pension reforms wend their way through Washington, there's an assumption among the elite classes that most people don't know how to handle the money in their retirement accounts.

While most everyone could use more education on investing for retirement, to my mind that doesn't equal imposing strict limits on what Mr. and Ms. Saver can do with their own money. Americans know at least as well, and probably better, how to handle money than do their representatives in D.C.

The latest evidence comes courtesy of Charles Schwab (SCH ). The giant discount-brokerage firm recently released findings from its first survey of some 60,000 users of what it calls its "Personal Choice Retirement Account." These are known generically as self-directed brokerage accounts, or SDBAs, within 401(k) plans. (Schwab has 95,000 users of such accounts. For the survey, it excluded those with balances of less than $5,000.)


  Compared to employer-sponsored retirement plans, SDBAs offer employee-investors far more choice. Instead of a dozen or so investment options, SDBA holders usually can pick from hundreds or even thousands of investment possibilities, from mutual funds to stocks and bonds. Where such accounts are offered, they are popular. In the year-and-a-half they have been available at Southwest Airlines, for example, more than 22% of the company's pilots have opened SDBAs. These accounts supplement the 11 investment options in their core 401(k) plan, which holds a total of $654 million in assets.

Schwab, which hopes to build its roster of SDBA holders, obviously wants to present information about these accounts in the best light. It hopes that its recent survey, which it expects to repeat quarterly, will allay fears of employees day-trading their way to ruin. "It gives reassurance to plan sponsors that self-directed brokerage accounts are not being misused," says Schwab's Ben Brigeman, a senior vice-president in the company's corporate-services unit.

So what did Schwab find out about how these investors are handling their money? Contrary to some fears that people would put all of their savings in the most go-go stocks they could find, Schwab reports that 29% of the assets were in money-market and fixed-income accounts. Interestingly, much of the move to bond and cash funds came early last year, ahead of rallies in the fixed-income markets, Brigeman said. This dovetails with indications from other big fund complexes, such as Vanguard Group, that suggest most long-term retirement savers did not panic through the bear market or after the terrorist attacks of September 11.


  What's more, clients' principal use of the SDBA was to tap a broader array of mutual funds, which claimed 43% of their assets. And when they did venture into direct investments in stocks, the most common holdings were mammoth large-caps such as General Electric (GE ) and Citigroup (C ), not such volatile issues as JDS Uniphase (JDSU ) or Qualcomm (QCOM ). Last year, the typical SDBA client made eight trades altogether, and among those just six in equity investments.

Critics of SDBAs usually maintain that employees aren't capable of directly managing their own money or that most employers' plans offer enough choice. It's true that the typical investor profiled in this survey is a 44-year-old professional with above-average investing knowhow. But if you look at how people vote with their feet, you can see a plain problem with the standard 401(k). Schwab found that its typical SDBA customer had 63% of his or her money in investments offered by the SDBA, while just 37% went into the 401(k) plan's core choices.

What that tells me: As Washington fiddles around with trying to prevent another Enron-style retirement-plan debacle, it ought to seize the opportunity to encourage companies to offer Americans more of what they really need: choice. Bills pending on Capitol Hill would, in different degrees, encourage diversification and choice. But to my mind, the more choice, the better.


  Richard Doherty, director of member benefits for Southwest Airlines Pilots' Assn., told me that an SDBA is not for every employee. But he has heard no complaints from the rank-and-file in his organization since it has offered the service. "It just gives them more flexibility," he told me. "We feel it's working pretty well."

For Washington to mandate that retirement plans cap the percentage of their assets in any one investment, such as company stock, is a sound guide to diversification. But another way to promote diversification -- a portfolio's best insurance policy -- is to offer choice. Self-directed brokerage accounts are a good tool for the job, and 401(k) plan sponsors should keep an eye on their success.

Barker covers personal finance in his Barker Portfolio column for BusinessWeek. His column appears every Friday, only on BusinessWeek Online

Edited by Patricia O'Connell

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