Who’s Running Your 401(k)

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Dan Klein runs the 401(k) plan at a small New Jersey hazardous-materials company, so when it comes to investing advice, he?s the go-to guy for his co-workers. Ask for help and he?ll explain the difference between stocks and bonds, value and growth. He may even suggest a portfolio. It?s fun, Klein says: “I probably should have been a financial planner.”

Maybe so, but there?s just one problem: He?s not one. Klein does have a midcareer MBA, but he went to school for chemical engineering and spent much of his working life cleaning up toxic spills. Nine years ago he traded up to the brickyard view from the vice president?s office; one of his first initiatives was to start a 401(k) plan for the company?s 26 employees, and he aggressively encouraged everyone to sign up.

“I only wish someone had done it for me,” Klein says. Now he?s in charge of not only the firm?s financial operations but also his colleagues? retirement security ? a far cry from his days in a hazmat suit.

With the economy and the markets showing tentative signs of a rebound, millions of Americans are focusing on their 401(k) plans with fingers crossed, hoping to make up the estimated $3.7 trillion employees? retirement accounts lost during the crash. But at all except the biggest firms, the men and women watching over those funds need no special qualifications, no investing expertise or experience. In practice, the job often falls to the company president, a human resources manager or a committee of employees ? in other words, people who are experts at something else.

At one $54 million construction company in Idaho, the company?s founder runs the plan. His main qualification? Four decades in construction. Ultimately, these people have authority over which funds will be offered, what fees employees will pay and how much education and advice workers will get ? the kind of features that dictate how each worker?s investments will fare.

“Your performance depends on the decisions they make,” says Mike Alfred, chief executive of BrightScope, a California company that rates 401(k) plans.

Of course, few managers are truly flying solo; nearly all hire brokers or consultants to suggest funds and make sure the plan complies with the law. Some administrators devote long hours to the plans and take courses to bone up.

But critics say retirement planning has become too complex to be left to amateurs, and even hired help needs oversight. Brokers, for example, are not legally required to pick funds with low fees, so 401(k) plan managers who sign off on pricey funds could cost their workers tens of thousands of dollars over the long haul. Officially, 401(k) administrators are also responsible for employee education about retiring, a task that often gets lost in the shuffle.

“They?re trying to do the right thing,” says Teresa Ghilarducci, director of the Schwartz Center for Economic Policy Analysis at New York City?s The New School. “But they?re not as competent as investment advisers.”
This arrangement has come under periodic attack, and it?s facing another wave of criticism now, as baby boomers struggle to recoup lost savings and Washington buzzes about reforms. But with some 465,000 managers out there running 401(k) plans ? under virtually no regulatory supervision ? no solution will be easy.

And given that large companies usually hire in-house experts to run their plans, the ad hoc nature of smaller companies? plans can get overlooked in policy debates. So for the moment, workers at companies with fewer than 1,000 employees, which account for more than 90 percent of the nation?s labor force, must count on the resourcefulness of whoever happens to be running their plan.)

AMATEUR PLANNERS

Dan Klein ? who runs the 401(k) plan for a small hazardous-materials company in Piscataway, N.J. ? would never leave his co-workers hanging. “If I can help, I want to,” says Klein, whose desire to protect and serve is deep-rooted ? he?s also a reserve police officer in the town where he lives. No one can say he?s not trying. He has instituted a generous 4 percent match for employees and says he?d like to raise it next year. And he has kept tabs on the brokers: He fired the company?s first middleman when he discovered there were steep penalties for anyone who left the plan within two years ? a detail that escaped him when he first signed up.

“I try to read everything,” he says. “But some of the documents are, like, 500 pages.” In search of a better deal for his employees, he found a broker who promised the company would pay no fees for three years if the company worked exclusively with one particular fund company.

Nothing, of course, is truly free, and the reason Klein was able to score such a deal illustrates the perils of good intentions. The reason it was free was that the fund company was paying the broker?s fees. That?s not uncommon or unethical. But it gives brokers an incentive to look for attractive fee deals, rather than hunting down the cheapest and best-performing funds.

“Is it a good deal for the sponsor and the broker, or is it a good deal for the participant?” asks Mike Alfred, chief executive of BrightScope, a firm that rates 401(k) plans. And in fact, within a year or two, Klein says his broker told him it was switching all its clients to another firm. “As long as you don?t charge us any fees,” Klein said, and OK?d the change.

So far, Klein is satisfied, and the employees aren?t complaining. They have more than 50 funds to choose from, far more than at most companies this size, and Klein says he?ll add more if an employee asks. Still, in tough times like these, what most plan members seem to want is advice, and Klein has been happy to help them figure out where to invest.

If asked, he says, he?ll show them his own portfolio, which includes an aggressive mix of growth stocks, energy and international companies. That?s a fine mix for Klein, since he?s not planning to retire for another two decades.

But it?s not for everyone, of course. Stephanie Burke, the office?s operations manager, says she has leaned on Klein for advice for years, with no regrets. Just before last year?s crash, her husband, an investment hobbyist himself, suggested she move some money to cash. But Burke stayed in stocks and took a heavy hit when the market tanked in the fall.

“Whoops,” Burke says now. “Good thing I?m not planning to retire any time soon.” For his part, Klein says the crash has made him realize just how much responsibility he wields ? for better or for worse. “I don?t want anyone to say, ?You screwed me over,?” he says.

2009 Copyright The New York Times Syndicate