Pension Protection Act Defines Three Types of Managed 401(k) Providers

Many companies in the 401(k) industry are touting the Pension Protection Act (PPA) as “revolutionary.” Yet, few remember that many of the elements in the PPA were well underway before it’s signing. The PPA brings needed clarity to the managed 401(k) services in existence since 2001.

(PRWEB) October 12, 2006 -- The Department of Labor (DOL) recently came out with the first of a series of clarifications related to the Pension Protection Act (PPA). The initial clarification was associated with “safe harbor” investments related to auto-enrollment. Companies can safely auto enroll 401(k) account holders into a blended fund, a time-dated fund, or a professionally managed account.    

For the most part, this first ruling, which many believed was already underway pre-PPA, was well received. In fact, a recent survey of corporate chief financial officers by Financial Executives International and Baruch College in New York showed that 28% of CFO’s surveyed said they have made or plan to make changes based on the law’s provisions.

Interestingly, the Pension Protection Act as it relates to the 401(k)/403(b) is a culmination of a variety of services that have been evolving since early 2001. Many companies have been providing employees with professionally managed accounts as well as implementing auto enrollment for many years.

Prior to the signing of the Pension Protection Act Plansponsor magazine reported, “…a growing number of employers are embracing the notion of automatically enrolling eligible employees who don't sign up for their 401(k) on their own (more than 14% of plans now do this, including 22.7% of large employers)” (August 2006).    

While many of the features in the Pension Protection Act have been available for many years, it has helped define three distinct types of managed 401(k)/403(b) providers:

"Mass market" solutions that seem to focus on auto enrollment and provide little if any face-to-face contact with employees. This group includes companies like Morningstar and Financial Engines.

"Cross selling" solutions that provide a managed account service along side other financial services like proprietary mutual funds, insurance products, annuities, and IRA's. The PPA dictates this group use a “computer model” to create portfolios and that all conflicts of interest are disclosed in an easy-to-understand format.

"Personal Account Management" solutions that have a singular focus (don’t cross-sell other products) and provide personal face-to-face contact, hand-holding, annual reviews, proactive communications, etc.

Each type of service fills different needs. For example, a company with 150K employees may feel the "mass market" solution would work best for them, and a small company with 10 employees may like the idea of a financial adviser helping with the 401(k) as well as providing other services. Medium-sized companies with 700 to 10,000 employees seem to gravitate to a singularly focused, personal account management solution like Actium LLC’s BeManaged service.

Some managed 401(k) providers are questioning the “auto-enrollment into a managed account” model due to the lack of communication between the 401(k) participant and the managed 401(k) provider. “The strength of the managed 401(k) is being able to manage someone’s account based on their unique financial situation. If you remove two-way communication via auto-enrollment, how can one effectively manage someone’s 401(k) account?” asks Jeff Sinatra, Chief Operating Officer of Actium, a Managed 401(k) provider.

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