The Prudent Fiduciary

Scott Pritchard | Principal

A look at the major issues that are shaping fiduciary best practices today.

The 401(k) Plan: Commodity or Service?

July 2008

The burning smell coming from my wife’s computer was definitely not a good sign. After roughly five years of service the desktop PC was ready for the trash heap.

So we faced some choices in replacing the PC – choices that reminded me of the choices plan sponsors face when considering changes to their 401(k) plans:

• Best Buy…name recognition, large selection, and broad price range; yet staffed primarily by service technicians who are IT generalists.
• Dell…name recognition and perception of lower price; yet forced to order on-line or through an 800 number and work with whoever happens to answer my call.
• Computer Mechanix (a local “mom & pop” computer service)…in-home consultation and installation by the owner of the firm; yet at a perceived higher price.

Some people may say that a desktop PC is a commodity; that all PCs are the same and should be purchased based on convenience and price. But those people have yet to have the experience I’ve had of going the expedient route only to be haunted by continuous problems from that “commodity” (especially haunting when it’s your wife’s PC!).

Some plan sponsors obviously share the “commodity” view regarding their 401(k) plans. There are many daily demands on busy professionals and retirement planning is seen as a “tomorrow” issue. The process appears to be “We need a 401(k) plan…ABC is a recognizable name offering a large selection at a reasonable cost…Let’s go with it.”

But if plan sponsors have monitored at all how their plan participants are faring in saving for a secure retirement, they can see that the average American worker is woefully unprepared for retirement. That “commodity” 401(k) plan isn’t working out so well.

For me the decision was simple. This PC was an important purchase with long-term implications. I had previously gone the expedient, “low-cost” route and lived with the unpleasant results. Computer Mechanix was the obvious choice.

I think fiduciaries of 401(k) plans would benefit from a similar worldview. The fact is these are benefit plans. They are designed to be a benefit for the employees, to make them happy and productive and glad to be working for their employer. When plan sponsors treat the 401(k) plan like a commodity to be dealt with as cheaply and infrequently as possible, then 401(k) plans rarely prove to be a benefit for either employee or employer.

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