Sunday, February 21, 1999
One of the most important developments in 401(k) plans was launched last fall with no publicity. There were no stories in Pensions and Investments magazine. No big ads in Money magazine. No proud proclamations in Kiplingers. No fancy marketing materials were sent to financial reporters.
Why the silence?
The innovation didn't come from the mutual fund industry. Instead, it came from a privately held company that was looking for a tool to solve the problem of investment decision making for people who aren't interested in investments and don't like to make decisions.
Here's the story.
Safelite, headquartered in Columbus, Ohio, is a privately owned $900 million manufacturer and installer of automobile replacement glass. They are the largest company in their industry, with 675 service centers, 75 warehouses, two manufacturing plants, and about 6,000 employees.
In addition to offering six mutual funds that provide a range of asset class choices, Safelite added a fundamentally new choice last fall, the Professionally Directed Investment option. If the employee chooses the PDI option, his contributions are sent to an investment management firm that will make all the decisions for the employee. Basically, the money is managed as though it was a contribution to a traditional defined benefit pension plan fund.
The employees, in other words, can make one choice, once, and have someone else take responsibility for investment management. The only responsibility left for the employee was to keep on saving and to make certain that they saved enough to reach their target goal.
What was the response?
More than half the employees who responded chose the new option.
"A lot of people aren't investment experts so when there is an opportunity for professional management, they will take it." Safelite Chief Financial Officer Doug Herron said in a recent telephone interview.
Instead of trying to select a single fund or choosing a mix of funds, Safelite employees now have the option to "let George do it" and have their 401(k) contributions managed entirely by professionals.
"It's actually bringing into the 401(k) arena a feature analogous to traditional pensions." Mr. Herron said. "In a typical plan you don't have this feature but we thought it was a good idea and we want to make sure we're making good options available to people."
He knew of no other companies that offered a similar option.
"One of the issues we considered is that a lot of the self-management options (that are part of typical mutual fund 401(k) plans) foster things like daily valuation, trading, and so forth— things that aren't very good for a long term investment program. This idea— PDI— is consistent with long term investing."
The idea for PDI came from Brooks Hamilton, a Dallas benefits attorney and 401k plan record keeper who serves as record keeper to the Safelite plan. Mr. Hamilton, is concerned that many 401k plan participants will make poor investment choices, reducing their retirement income or making it impossible to retire. Citing fiduciary responsibility and possible employee lawsuits, Mr. Hamilton has examined the range of returns among employees in different 401(k) plans.
His conclusion? It's basically potluck. Some employees will retire at more than 100 percent of final pay. But the poorest performing 20 percent are likely to retire at less than 15 percent of final pay. (In an earlier column, September 6, 1998, Mr. Hamilton estimated the total liability at some $3 trillion, a sum that dwarfs even the tobacco lawsuits.) Invest a reasonable portion of employee wages in a pension-like fund that invests in stocks, bonds, and other assets, however, and the probability of a good retirement soars.
Will you and I see such options in our 401(k) plans soon?
Yes, but it will be over the dead bodies of mutual fund marketing departments.
Simple. The PDI option opens a massive door for assets to flow out of the relatively high expense mutual funds the now dominate the industry and into low expense institutionally-priced funds.