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By Jason Stipp | 01-22-2014 04:00 PM

Can 401(k)s Get the Job Done?

Roundtable Report: Christine Benz, John Rekenthaler, and David Blanchett weigh in on how this savings vehicle can be made better and used better by the increasing number of Americans who will depend on it.

Jason Stipp: I'm Jason Stipp for Morningstar. Just about any discussion you'll have about how retirement has changed in the last 30 years will come around sooner or later to the 401(k) plan. As Corporate America had shifted from defined-benefit plans, or pensions, to defined-contribution plans, such as 401(k)s and 403(b)s, more of Americans' retirement security is now in their own hands.

Now we can discuss whether that's a good thing or a bad thing, and we will. But more importantly at least for the foreseeable future the 401(k) plan is going to be front and center in most Americans' retirements.

The practical issue is how do we make this work? Well joining me are three of Morningstar's finest: Morningstar's Christine Benz, our director of personal finance, David Blanchett, head of retirement research for Morningstar Investment Management, and John Rekenthaler, vice president of research for Morningstar and also columnist on who has written about 401(k) plans a lot in the last few months.

Thank you all for joining me and digging into this very important issue what we can do with these 401(k) plans and similar plans now that we have them as a big part of our retirement here in the U.S.

Let's start out very simply and just talk a little bit about the structure of these plans and how they work. There are a lot of folks involved in 401(k) plans. Of course they are administered through employers, so you get access to these plans based on where you work. But there are a few people involved in running them and managing them.

David, can you talk first of all about who's involved in the 401(k) plan, and who's making these decisions?

David Blanchett: The employer is what's called the plan sponsor; they chose to setup the 401(k) plan for their participants. 401(k)s are based upon on an Internal Revenue Service statute, but they are all very different. There are a few different ways you can actually build a 401(k) plan for participants. There are different features. Some plans have automatic enrollment features. Some plans do not. Every plan is a little bit different because every employer is a little bit different.

Stipp: There are different people who are potentially responsible for offering the plan, managing the plan. And there are also the fiduciaries who are responsible for what's actually in the plan and [determining whether it's] the best thing for fundholders. Who are some of the players?

John Rekenthaler: There are a lot of moving parts in this. You've got the plan administrator, a record-keeper, somebody who keeps the records. You've got the investment provider, which may be the same as the record-keeper or maybe largely the same. Often they are partially the same, but there'll be investment funds from other organizations. [There is the] record-keeper and the investment provider. There is often a consultant involved with a larger or a midsized company as well, or somebody settling in to an advisor role if it's a smaller company.

There are quite a few different participants along with the plan sponsor, which makes sense because after all, with the plan sponsor, unless it's a really large company, the company probably does not have somebody who is devoted to understanding ERISA Law and investment management issues.

That's a funny thing about the 401(k). The 401(k) is governed under ERISA Law. This is pretty specialized stuff, and to be a proper fiduciary requires quite a bit of investment knowledge. And small or medium-size companies have other things to do besides becoming investment experts.

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