Who's Running Your 401(k): An Overview

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 coworkers. 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, CEO 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 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% of the nation’s labor force, must count on the resourcefulness of whoever happens to be running their plan. To get a rare, ground-level look at the folks in charge of so many people’s nest eggs, SmartMoney tracked down a few of these managers, including the owner of an RV dealership already dealing with layoffs and a group of physicians with their own theories about investing: