Ted Benna wants to make something absolutely clear; a warning for 401(k) advisors specifically, and the industry in general.
“The long-term risk for 401(k) advisors is that if they don’t clean up the business, national and state-level government plans will take over,” he says. “I’ve known [DOL Assistant Secretary] Phyllis Borzi a long time, and she’s serious about cleaning up 401(k)s. For all the heat she’s taken, I commend her.”
Benna, commonly credited as the “father of the 401(k)” for his early work (and risks) with the retirement vehicle, points to a particularly egregious case he’s recently come across.
“There are some people who deserve to get sued,” he bluntly states. “I’ve been asked to be an expert witness in 401(k) lawsuits many times. You get all the documents in discovery. I read the minutes of this particular defendant’s annual review meeting. They’re a plan sponsor that manages $2 billion dollars, and their annual review lasted 30 minutes. Now, they deserve to get sued.”
Benna’s comments come in the wake of last week’s announcement of the final fiduciary rule, but it’s purely coincidental. While obviously aware of the DOL’s big reveal, he’s seen it all before, and isn’t focused on the resulting fallout and challenges he says “are sure to come.” Nonetheless, certain industry practices must—and, according to Benna, will—change.
“Plan sponsors have always had an obligation under ERISA to put the interests of their participants first. Unfortunately, there are 401(k) advisors who are paid handsomely for not doing a whole lot.”
Legend aside, Benna was not a young actuary reading section 401, subsection (k) when he happened upon his eureka moment. He was, however, a gifted young benefits consultant who wanted to do right by his clients.
“The regulations came out in 1978, but like the deferred timeline in last week’s fiduciary rule, they weren’t effective until January 1980,” he explains. “Now on Jan. 1, 1980, there weren’t advisors running around selling these plans; there weren’t mutual fund wholesalers and similar people like there are today.”
It wasn’t until later that year when Benna says he was developing a retirement plan for a bank client in Philadelphia that he added a matching contribution as well as “the pre-tax salary reduction.”
“Nowhere did it say I could add these provisions, but nowhere did it say I couldn’t either,” he quips. “I’d been discussing it with an official and he didn’t say one way or another, but from our conversations I was pretty confident that the final rules would allow for them, which they did.”
The Philadelphia bank ultimately passed on the idea because, unsurprisingly, their attorney didn’t want them to experiment in that way, so Benna and his colleagues at the small consulting firm tried it themselves.
The rest may be history, but the innovation continues. Similar to independent audits of banks and investment companies, Benna believes independent consultants are now critical for plan sponsors and advisors when determining the appropriateness of their fees. He’s started a firm, 401(k) Benna, to do just that.
“This isn’t about ‘do what we say, or you’ll get sued.’ This is about best practices and ensuring 401(k) plan participants are put first. We serve mid-market plans, those with between $10 million and $50 million. It’s support for a smaller end of the market at a lower cost.”
So how does he feel about the 401(k) experiment over the past 35 or 40 years that he helped create? It’s a complicated answer.
“It gets into a larger issue,” he says. “There is a general perception, mainly from the 401(k) haters, that the defined benefit plan was great and now [retirement saving] is all screwed up with 401(k)s. But what both defined benefit and defined contribution plans need are a robust economy and healthy stock market. Many defined benefit plans make promises that may or may not be realized due to the underlying funding of the plan. At least with a defined contribution plan you always know what the asset situation is.”
He points to the fact that fully 97 percent of 401(k) plans cover 100 or less employees. Those firms, he argues, would have been too small to have defined benefit plans anyway.
“Both defined benefit and defined contribution plans have strengths and weaknesses,” he diplomatically adds. “There is this annoying idea that somehow we had this great system before defined contributions. I remember working at a company in the early 1960s when I first started out. You were able to participate in the retirement plan at age 30 if you were a male and age 35 if you were female. You then needed to stay with the company until age 60. Well, firms like these were famous for trying to get people to leave just prior to age 60, which means you’d get nothing. And there was no safety net if the company went out of business; that was it.”
Alicia Munnell, director of the Center for Retirement Research at Boston College, has recently had a change of heart, as have a number of other traditional critics of the 401(k) structure. Munnell announced that her research shows defined contribution plan replacement rates compare favorably with those of defined benefit plans, which is a vindication of sorts for Benna, but he stays humble.
“It’s a love/hate relationship with 401(k)s,” he chuckles before concluding. “Yes, I feel vindicated until the next market drop, and then they’ll be back to hating them.”