401(k) Retirement Plans Getting Better While They Grow Bigger : Investment: Many workers are being allowed to choose from at least three vehicles and are able to move their money around more frequently.

As they grow in size and number, employer-sponsored 401(k) retirement savings plans are also getting more sophisticated.

At many places of work, employers who offer these tax-favored programs are giving employees more choices of places to put their money, and more frequent chances to move that money around.

It all amounts to “giving workers greater control over investments in their retirement savings plans,” says the New York consulting firm of Foster Higgins.

A prime impetus for this trend is a new set of voluntary Labor Department regulations, which employers may follow in exchange for a degree of protection from future liability suits over matters such as poor investment results.

Known as 404(c) regulations after the section of the law that covers them, the standards specify that investors must get at least three significantly different vehicles to invest in, and the freedom to move money among those vehicles at least every 90 days.

The regulations, which allow 401(k) plan sponsors to adopt them as of the beginning of their next operating year, also set rules for increased information and disclosure to participants.

“This really fosters a new means of understanding between the employer and the employee,” says Peter Scott, an attorney at Massachusetts Mutual Life Insurance Co. in Springfield, Mass. “It will allow participants to be better informed.”

Mass Mutual, which recently surveyed more than 1,000 companies, reports that 60% of the respondents offer 401(k)s, up from 34% in 1984, and another 9% said they were likely to start programs soon.

“Many companies are providing plans that may already meet or exceed the Department of Labor’s regulations,” it says.

“Sixty-five percent have added at least one option to their plans since 1990. Eighty-five percent now allow transfers or changes at least quarterly.”

Foster Higgins, which separately surveyed more than 700 employers, said the average number of investment choices among plans in which employees have a choice about where their money is invested has increased to 4.8% from 4.2% in 1992 and 3.5% in 1990.

The idea behind greater choice is not only to allow employers more chance to control their own financial destiny, but also to provide for diversification, which is one of the best means available for coping with risk.

A basic plan that meets the 404(c) standards might include at least one diversified stock mutual fund, a diversified bond fund, a money-market fund, and an alternative with a fixed yield such as a guaranteed investment contract (GIC) sold by an insurance company.

With the ability to diversify, employees can be encouraged to take the risk of growth investing with at least part of their money.

“The danger is that employees often are being too conservative in their 401(k) investments,” says the Institute of Certified Financial Planners, a trade group.

“Many investors choose GICs and other low-yielding vehicles such as money-market accounts because they consider them ‘safe’ compared with higher-risk investment options such as stock or bond funds.

“Though not as volatile as stock and bond funds, GICs and money-market accounts generally earn lower rates of return over the long run.

“Historically, these investments have barely managed to stay ahead of inflation and the taxes that will eventually have to be paid on the tax-deferred contributions and earnings.”

As 401(k)s gain greater flexibility, an adequate flow of information from the sponsor to the employee becomes more and more important.

The more they know, the better position employees are in to decide what to do--and what not to do, in terms of taking too much risk or making too many moves.

Foster Higgins notes that 28% of respondents now permit employees to move their money around daily.

This looks appealing, says Brian Ternoey, principal in charge of Foster Higgins’ investment service group. But he adds, “many employers remain concerned that employees who use this feature will react inappropriately to an interest-rate jump or stock-market correction and lock in losses.”