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Sunday, February 8, 2004
 
Nearly there

Employers, employees paying more attention to 401(k) plans

By Tom Petruno
Los Angeles Times

It's a tough call to say who's more worried about company retirement-savings plans: aging baby boomers who don't have nearly enough invested in the plans or the people who oversee the programs — and who risk getting blamed if workers are undersaving.

There actually was good news for all concerned last year. The stock market's rebound helped lift many Americans' balances in 401(k) and similar employer-sponsored retirement plans for the first time since 1999.

That is making year-end account statements a lot more pleasant reading. And it may make more people think about raising savings levels or about allocating assets more thoughtfully among 401(k) plan choices.

Those choices have become more diverse in the past 10 years, which is another reason employees ought to take a fresh look.

For the company managers charged with administering 401(k) programs, last year brought increasing pressure to show that the plans are meeting employees' needs. Federal regulators are breathing down companies' necks on the issue of fiduciary duty: the question of whether a company is doing the best it can to help workers invest their retirement nest eggs responsibly.

"There's a greater intensity of scrutiny and a broadening of what companies look at" in reviewing their 401(k) plans, said David Wray, president of the Profit Sharing/401(k) Council of America in Chicago, an association of companies that offers the plans.

The mutual-fund-industry scandal heightened the urgency for a closer look at the programs, Wray and other experts said.

Funds are the primary investments offered in company-sponsored retirement plans. The accusations of trading abuses involving some funds and the broader issue of the fairness of fund fees and expenses are forcing 401(k) plan managers to ask more questions about the portfolios they offer workers.

The federal Department of Labor, which oversees retirement programs, says "employers have the specific obligation to consider the reasonableness of fees," said Betsy Faber, who heads the 401(k) plan unit in the Western United States for Mercer Human Resource Consulting.

There's another issue enhancing the importance of 401(k) and similar so-called defined-contribution retirement plans: There have been headlines in recent months about the difficulties faced by traditional company pension plans, the "defined-benefit" programs under which firms promise employees a stream of income in retirement.

Many companies haven't put enough money away for those plans. By contrast, there is no questioning the nearly $2 trillion in 401(k) and other such plans that cover about 42 million workers. The assets are there; the only issue is, will the money grow at a rate that will ensure a decent retirement for plan participants?

Many factors will determine the growth rate of 401(k) sums, including what happens with the stock market in the next 10 years. But the quality of the investment options in the plans, the rate at which employees contribute and how much of a matching contribution, if any, their companies make also will be key to growth.

If you're covered by a 401(k) or similar plan, how can you tell how well it stacks up? A recent survey offers benchmarks for comparison. Here are some:

• Investment choices. The average 401(k) plan offers 13 investment options, according to a Deloitte Consulting survey of 700 plans nationwide last summer. The number has risen from an average of five or fewer options in the early 1990s.

The Deloitte survey found 26 percent of plans last year increased the number of "core" mutual funds available, referring to funds that focus on broad market swaths, such as blue-chip issues or foreign stocks.

Eight percent of plans added "lifestyle" funds. Those portfolios often are structured to simplify the diversification question for investors: Some lifestyle funds age with the investor, automatically shifting more heavily toward conservative investments (such as bonds) as the investor nears retirement.

• Contributions. Most employees save between 4 to 8 percent of their annual salary in their 401(k) plan, the survey showed. Plan rules vary on maximum permitted contributions, but most people could save a lot more than they do.

About 70 percent of companies in the Deloitte survey made contributions to employees' accounts. Some match employees' contributions dollar for dollar, others pay some percentage of what workers put in.

Many publicly traded firms have made matching contributions in the form of company stock rather than cash. That has been controversial because it puts employees at risk of financial ruin if too much of their savings is in company shares and the company fails. To lessen that risk, more companies have given employees the right to immediately sell company shares in their 401(k) plans and shift the money to other options, the Deloitte study found.

• Plan review. More than 80 percent of companies in the Deloitte survey said they had formal procedures for reviewing the performance of mutual funds in their plan.

Although about 60 percent of companies in the survey said they paid all expenses involved in their 401(k) plans, that is misleading: The mutual funds in the plans take their management fee straight from fund assets each year, which means that cost comes out of employees' returns.

Leslie Smith, an author of the Deloitte study, said survey results suggest many companies don't have a grip on the total costs of their 401(k) plans.

• Investment education. How much money should you have in stocks versus lower-risk investments? How much does someone need to save to ensure a happy retirement? Questions such as those can perplex many workers. The survey found 36 percent of companies offer all employees customized investment advice.

 Strategy session

Is a buyout right for you?

Before accepting or declining a company's buyout offer, consider these things:

• Can you afford to leave the company early? Prepare a budget and lay out what you'll need to live on.

• If you leave, what nonsalary benefits will you be forfeiting? Stock options? Other benefits?

• How attractive are the pension and retirement benefit sweeteners? How many years are you into your traditional pension? A pension grows the longer you work. Defined-benefit pension plans promise workers a specific monthly benefit at retirement. The amount of the benefit is usually based on factors such as age, earnings and how long you've worked for an employer.

• Will you have to pay for your own health insurance? Most buyout offers don't include health coverage. Even if the company says it will continue your health insurance, check to see if the firm has the right to change or cancel the coverage at any time.

• If you remain with the company, what are the chances you will be laid off? The gamble is that you'll lose your job with no severance package at all or with a severance package that's less attractive than the one you were originally offered.

• If you accept the buyout, will you eventually get a job at another company, and can you get another job at your age?

• Are you psychologically ready to stop working entirely? Is your spouse prepared to have you full time at home?

— The Dallas Morning News



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