Brokerage accounts jazz up 401 plans

Nation's Business, May, 1997 by Randy Myers

When Eugene Kahle went shopping for a new 401(k) plan for his employer, TAP Publishing Co. in Crossville, Tenn., he knew he wanted a plan that would offer a wide range of investment choices.

He got enough to satisfy even the most adventurous 401(k) investor: a Charles Schwab & Co. plan that offers participants 11 mutual funds plus a full-blown brokerage account that gives them access to any mutual fund, stock, or bond that Wall Street has to offer.

"I do not want any employee to ever come to us and say that we are hindering him in his investment choices," says Kahle, controller of the 125-employee company. "This plan eliminates that possibility."

Look for more companies to offer employees brokerage accounts, particularly as U.S. workers become increasingly savvy about their investment activities and see their maturing 401(k) accounts grow into six-figure assets.

Three years ago, Access Research Inc., financial-services consulting firm in Windsor, Conn., did not even ask 401(k) participants whether they had access to brokerage accounts when it conducted its biannual survey of their in vestment activities. Last year it did ask-and got responses indicating that 4.5 percent of the nation's 23.5 million 401(k) participants could access a brokerage account and that 13 percent of those with access did so. Those who use brokerage accounts typically have the largest balances.

Where The Demand Arises

To date, 401(k) brokerage accounts have been most popular among two types of employers: those that are very large and inclined to offer as many investment options as possible to their broadly diversified work force, and smaller, white-collar companies where an above-average percentage of employees are likely to have investment expertise.

Law firms, accounting firms, engineering companies, and software concerns have been among the first to adopt such accounts, according to Jeffrey Close, a vice president of Access Research.

Stephen Butler, president of Pension Dynamics Corp., a third-party pension-administration firm in Lafayette, Calif., says: "The brokerage-account option is a very effective tool because it blunts criticism of a plan over its investment choices. You open up the entire universe of traditional investment opportunities without saddling the entire plan with the cost of providing that flexibility."

Plan sponsors don't pay extra to offer brokerage accounts because the associated costs--typically a small annual fee plus any trading commissions--are charged directly to the plan participants who use the accounts.

At TAP, employees who use Schwab's Personal Choice Retirement Account pay a $250 setup charge and an annual fee of $100, plus any commissions or mutual-fund sales fees they incur. Butler's company charges plan participants $500 per year plus applicable commissions or sales fees.

Not For Everyone

Although offering access to a wide variety of investment options could be beneficial for some employees, for others it could be like giving a person with a sweet tooth the keys to a candy store. Overly enthusiastic or unsophisticated investors could buy stocks based on ill-advised tips or could churn their accounts in bursts of overzealous trading, piling up trading commissions that would eat deeply into their profits. Critics fear that unsophisticated investors would lose a substantial portion of their retirement savings.

"For the average participant who doesn't already have some expertise in buying and selling individual securities, it's not a particularly useful option," says Close.

At TAP, which publishes trade magazines and operates a commercial printing business, only four of the 118 employees enrolled in the company's 401(k) plan take advantage of the brokerage-account option, and one of them is Kahle. Rather than push other employees to join him, Kahle worries about making sure that investment novices don't get in over their heads.

"Before an employee takes advantage of this, I undertake to make sure they know what they're getting into," Kahle says. "This option would actually represent a disadvantage to employees if they were not knowledgeable about investments and started using the account to haphazardly make decisions, like chasing the hot fund of the day."

Of course, not every company has someone who, like Kahle, has the time, financial savvy, or inclination to help employees decide whether a brokerage account is right for them. Instead, some employers try to safeguard their workers by limiting the investment choices available through the brokerage accounts.

Schwab will make trading in stock options available on a limited basis through its Personal Choice Retirement Account, for example, but TAP Publishing excluded access to stock options in its plan.

Some companies go even further, limiting investment choices strictly to mutual funds, albeit far more than are available in 401(k) plans without brokerage-account options.

Making It Happen

If your company's 401(k) plan is administered by a third party, a company that oversees the plan's operations but doesn't provide the investment vehicles, chances are you could add a brokerage-account option with relatively little trouble.