One firm dares to find a better way to run 401(k)s

If I could make a series of 401(k) action figures, one would be William ''Tex" Gross.

Someday, millions of younger workers may have better 401(k) plans because he saw a better idea and acted on it. Sound improbable? Then listen to the story.

Back in 1999 about 80 percent of eligible employees in America were participating in 401(k) plans, deferring 8.6 percent of their salaries. Today, participation has dropped to 70 percent, and deferrals are down to 6.9 percent.

We all know the reasons: The market wipeout of 2000-2002; criminal violations of trust like Enron; cutbacks in company contributions by managers with separate, superior, and fully funded retirement plans; and an ever-widening recognition that the mutual fund supermarket approach is a bonanza for financial-services firms -- but a path to misery for workers.

The better idea started with Brooks Hamilton, the Employee Retirement Income Security Act lawyer who regularly points out that most workers will ''retire to despair" -- largely due to the structural inadequacies of 401(k) plans. Hamilton urged Gross to install a revolutionary plan, one with automatic enrollment, a large company contribution, and a single managed fund.

Basically, he suggested making a 401(k) defined-contribution plan look as much like a defined-benefit pension plan as possible. Gross is president of SAMCO Capital Markets, a Dallas firm that provides growth capital to the banking industry. SAMCO is a subsidiary of Penson Financial Services, also located in Dallas.

George A. Kirchway, a SAMCO vice president, said the company wanted a plan that was oriented toward the lower-paid employees, not the bigwigs.

''One of the most compelling ideas we saw was the difference between two people with identical company histories but very different results in their 401(k) plans. We wanted people to have something to retire on."

The problem was how to get there. The existing plan offered 11 mutual funds from a major fund company. Employees had been sold on supermarket choice. They were also comfortable with the fund company brand. They weren't likely to volunteer to have all their money moved to a new portfolio, particularly one managed by a no-brand stranger. Early rumblings made it clear: A unilateral change would be DOA.

Enter Tex Gross.

A fan of free markets, he decided to retain all the existing funds, but add a managed-portfolio option. Workers would be defaulted into the managed portfolio unless they decided to invest their contributions elsewhere.

Basically, the company would make a pension-like investment unless the employee wanted to do otherwise. The two approaches would compete for the same money. That was January 2002.

Last December, employee participation was at 76 percent, well over the national average. The participation rate had nearly doubled. Equally important, the diversified default portfolio blew away the mutual fund choices offered by the big and respected mutual fund company.

Blew away?

Put it this way: By Dec. 31, 2005, only 6 percent of the assets in the plan remained in the 11 mutual funds. The other 94 percent was in the default portfolio. The 11 leading, well-known mutual funds were shown the door.

Gross smiles while telling this story. He knew it was a matter of choice. He knew money goes where it is treated best. Now all of us know that there is a better way to run 401(k) plans. There is a way that puts experts in charge of money instead of novices. There is a way that cuts record- keeping and administrative costs. There is a way that can bringmanagement costs down from the retail pricing of the mutual fund industry to the wholesale pricing of pension funds.

There is a way that will make employee accounts bigger when they retire.

What do we need to see this idea spread? Simple: We need corporate managements that go beyond the comfort and conformity of brand selection.

Scott Burns is a columnist for the Dallas Morning News. E-mail questions to scott@scottburns.com; fax to 214-977-8776; or mail to Scott Burns, The Dallas Morning News, P.O. Box 655237, Dallas, TX 75265.