401(k) participant direction was introduced because in the 1980s many believed workers would not participate in 401(k) programs if employers managed the plan's investments. Trust of employers at this time was at an all time low because millions of workers in their 40s and 50s were being laid off, thus losing their promised pension benefit, as American industry was retooling to meet the global competitive challenge. It was felt that maximizing voluntary participation required participant control over funds whose existence and performance could be verified every day in the newspaper.
Participant direction was institutionalized in the 1990s as the buoyant stock market raised the account balances of every participant and made investment management seem easy. During this period the most common participant complaint was that a company’s menu of choices was too limiting. Plan sponsors responded by dramatically increasing plan choices and plans with 40 or 50 choices were not unusual. Some plans had as many as a hundred fund options or more. In studies and articles 401(k) plans with the most choices were rated as best.
Between 2000 and 2002 the world changed and the 401(k) system changed as well. Corporate scandal, financial scandal, market volatility and the shock of 9/11 dramatically altered how participants and plan sponsors viewed plan investing. Participants no longer said give me more choices, they said give me more help. Many plan sponsor decision-makers, themselves 401(k) investors, concluded that unassisted 401(k) participant decision-making would not deliver the plan’s anticipated benefits for many of their employees.
As a result, plan design and practice began to change. The use of automatic enrollment started to increase. Companies began making advice available to plan participants. Managed accounts and target date funds were introduced as solutions for participants who did not want to make the investment allocation choice. Plan sponsors who earlier were comfortable selecting and monitoring plan investments on their own increasingly sought the advice of experts as they exercised their fiduciary oversight.
Going forward, all of above trends will continue. However, younger participants will still want the final say about whether or not to participate, the level of their participation and how their 401(k) assets are invested, even as they allow their employers to make these decisions for them. Older workers will want to customize their investment allocation as they prepare to enter retirement. If they leave their money in the plan after they retire, they will want control as they draw from their retirement savings. Participant direction will continue to be a standard 401(k) feature even as 401(k) plan design and practice continues to evolve.
David