Magic 8-Ball

Children, by design, have time on their side. Fortunate children are given this time to explore their world and expand their horizons. Much of this exploration comes in the form of questions (just ask any parent).

The Magic 8 Ball is a toy that fits this world of exploration. Ask a question – any question – and it will provide a response. Of the total (20) potential answers, ten are affirmative, five are negative and the remaining five are ambiguous. For kids, the most important element is a quick response. They can ponder the answer at a later date, or continue firing-off questions.

An unfortunate aspect of the aging process is that, slowly but surely, time becomes a very finite resource. Ambiguity, which has been described as the devil’s version of tetherball, loses whatever fun it once possessed and conflicting answers to the same question are simply unacceptable.

In the world of employee benefits, plan sponsors – as the über-adult for their respective employee bases — need definitive answers. The Magic 8 Ball’s positive responses (which include “It is decidedly so”) work well as a response to an important benefits question. What absolutely doesn’t work is a conflicting answer (such as “Don’t count on it”) to that same question five minutes later. Worse still are the ambiguous replies, such as “Ask again later.”

Unfortunately, the world of 401(k) plans is an adult equivalent of the Magic 8 Ball. Plan sponsors want definitive answers to their questions, and are fully aware that the wrong path could harm their employees and potentially cost their firm thousands, even millions of dollars. Some of the basic questions that are typically imposed include:

  • Which recordkeeper is the best?
  • What is a reasonable fee for recordkeeping?
  • Which investments are the best?
  • What is a reasonable fee for these investments?
  • How many investments should we have in our menu?

While many plan sponsors want what they feel is an easy answer to these questions, the unfortunate, but realistic, answer is often, “Reply hazy, try again.” There isn’t a single recordkeeper that is the best solution for all types and sizes of retirement plan nor is there a single menu of investments that clearly deserves to be utilized by every plan.

Plan sponsors could look to the courts to see what they have to say regarding the “reasonable” amount of fees or number of investments but as the recent decision involving Unisys shows, there is no single standard (in Magic 8 Ball terms, “Concentrate and ask again.”)

The reality within the 401(k) landscape is that there are plans that offer investments that meet or exceed 2% as a weighted average annual expense. There are also plans that offer an investment menu with an average weighted expense of .30%. While the pool is consolidating, there are still a number of recordkeepers to choose from (most are eager to point out that they are the best choice) and there is likely never going to be a shortage of investments from which to form a menu.

The only way to avoid all of this ambiguity is a government mandated standard for all of these elements. Some plan sponsors might actually welcome a scenario where the vendors, investments and fees are fixed. I suspect that the Magic 8 Ball would answer “Don’t count on it” if tasked with predicting whether or not the majority of plan sponsors would willingly relinquish their right to make these choices for their plans and their employees.

That leaves us with the ambiguous, often conflicting set of answers to the questions within the realm of 401(k)s. The best path forward is likely one that involves many questions, as well as documentation of those questions and the answers that emerge. The ability to make a choice comes at a price – “Without a doubt.”

*Originally published September, 2011.