It’s Time to See if Your 401(k) Measures Up

Is your 401(k) plan up to snuff?

With the stock market facing its worst year in at least a decade, many people who are saving through their employer’s tax-deferred retirement plan may be rethinking the investment choices they’ve made.

Others may just be looking to tweak their portfolio by shifting existing assets or new plan contributions into investment options that they’ve ignored until now.

But if your 401(k) program hasn’t kept pace with the improvements other companies have made in these plans lately, you may find yourself shortchanged.

For workers who have access to 401(k) savings plans--or, for teachers and others, 403(b) plans--the assets involved often become their biggest investment aside from their home. The average 401(k) account balance is about $50,000, according to the Profit Sharing/401(k) Council.

Because of the stakes involved, many companies have made changes to their plans in recent years in an attempt to keep workers happy and lure new ones.

Among the major trends: more investment options, much quicker enrollment and vesting, online access and offers of independent investment advice and education.

The changes have been driven by, and in turn are helping to drive, greater worker participation in 401(k) plans--which were named, by the way, for the obscure section of the tax code that permitted their creation in 1981.

The participation rate by eligible employees surged from 38% in 1983 to about 80% at the end of 1999, according to the Profit Sharing/401(k) Council.

The group estimates that 34 million of the 41 million eligible U.S. employees now take part.

The average 401(k) annual savings rate (excluding so-called highly paid workers), has risen to 5.4% of pretax pay from 4.2% in 1991. Companies typically match some percentage of workers’ contributions. On average, that match is 50% of the first 6% of employee contributions.

Still, many analysts say companies need to adjust their plan investment lineups to allow for better diversification among asset classes and among mutual fund families.

Perhaps most important, educating employees about investing must be a priority, experts say.

Some of the key areas of change in 401(k) plans in the last several years:

* More investment choices. Investment options in the 1980s were often limited to as few as three per plan. The number of choices has risen steadily in response to investor demand and now averages more than 13 per 401(k) plan, according to a study by Buck Consultants.

Many companies now are offering more than 15 choices.

For the most part, mutual funds dominate the list of plan options. And plan choices rarely are limited to a single fund family anymore.

Still, many 401(k) plans “seem to have a lot of family resemblance, with most of the investment options coming from one fund company,” said Tiburon, Calif.-based investment advisor Kurt Brouwer.

The options typically are dominated by the 401(k) services provider chosen by the company--such as Vanguard Group or Fidelity Investments.

Those giants can be cost-effective in administering a plan, but they may not yield the best investment lineup, experts say.

“In the future, plan sponsors will move away from that as participants demand the best vehicles. It’s very hard to believe that all the best choices could come from, say, a Fidelity or an American Century,” Brouwer said.

For now, plan investment options are evolving into a three-tiered menu, analysts say.

The first tier often is made up of “lifestyle,” or asset allocation, funds that offer one-stop shopping for participants who want to keep it simple.

These premixed baskets of stock, bond and money market funds are calculated to meet an investor’s risk tolerance or timetable at particular ages.

About 30% of 401(k) plans now use such funds, according to the latest survey by consultant Hewitt Associates, versus 9% in 1995.

Ventura-based Kinko’s Inc., for example, recently added a Fidelity lifestyle series to its plan.

The second tier, and still the most common, usually provides “core” options--diversified choices such as money market, domestic stock, foreign stock, and bond funds.

But many plans offer a number of large-cap fund choices but few or no mid-cap or small-cap choices. This year, small- and mid-cap funds have generally fared better than large-cap funds, a trend some experts believe could last for a while.

The third tier is a “brokerage window,” giving investors access to hundreds or even thousands of individual investments, including individual stocks. But companies often limit the brokerage window to mutual funds or allow its use with just a portion of an employee’s portfolio. Some, though, open it all the way.

There is a price for that level of choice: Brokerage-window users generally must pay trading commissions.

About 14% of companies surveyed for Morgan Stanley Dean Witter earlier this year said they offer a brokerage window, compared with 8% in 1999 and 5% in 1998. Los Angeles aerospace giant Northrop Grumman Corp. and the Los Angeles law firm Munger, Tolles & Olson are among those with such an option.

* Variable company-match policies. The percentage of companies that make their matching contribution exclusively in company stock fell to 28% last year, down from 46% in 1997, according to Hewitt.

Still, many large companies continue to match exclusively in company stock.

* Quicker enrollment. In the 1980s, employees often had to work for a company for, say, a year before being able to join the 401(k) plan, and four years more before becoming fully vested.

Today many firms offer immediate enrollment and vesting. That’s what Newport Beach-based tech firm Conexant Systems Inc. adopted in December 1998 when it was spun off from Rockwell International Corp.

Forty percent of companies offered immediate enrollment as of the end of last year, up from 32% a year earlier, said David Wray, president of the Profit Sharing/401(k) Council.

According to Morgan Stanley’s survey, 10% of companies now use automatic, or “negative,” enrollment for new employees--meaning you’re in the plan unless you opt out. An additional 25% said they plan to implement it by next spring.

Irvine-based Allergan Inc., which put in automatic enrollment at the start of 1999, said 94% of new hires have stuck with the plan, lifting the overall participation rate.

But Hewitt recently found that automatic enrollees tend to stick with the company preset savings rate and investment choices, which can be too conservative--especially for younger workers.

Still, Wray said the programs are so new that it’s unclear how much of a timidity problem there is. He also noted that the process brings in “a lot of financial illiterates” who would otherwise never take advantage of 401(k) saving at all.

* Online access. About 82% of companies either offer Internet access to accounts or plan to by next spring, Hewitt said. Most of those online allow fund switching and other transactions via the Internet or an intranet.

* More education and independent advice. The level of investment guidance provided by employers has increased, but many employees still are baffled by the complexity of investment choices offered and about how best to structure a portfolio, 401(k) consultants say.

Many workers, for instance, “don’t get the concept” of lifestyle funds, said Hewitt consultant Lori Lucas. “They’re supposed to be a turnkey solution, but employees often mix and match them with other funds,” she said. “Proper education requires a persistent, ongoing campaign at any company.”

Likewise, many plan participants aren’t sure how best to mix “growth” stock fund choices with “value” stock fund choices, or how to use bond choices in a portfolio.

About 27% of plan sponsors surveyed by Hewitt said they offer outside investment advisory services to workers or planned to by the end of this year.

Some companies, such as Westlake Village-based Dole Food Co., are contracting with services such as MPower.com or Financial Engines to offer individual advice. (MPower.com and Financial Engines also offer free general information for visitors to their Web sites https://www.401kafe.com and https://www.financialengines.com.)

But the advice question can put companies in an awkward position ethically and legally.

“Certain companies have had to tell people, ‘Hey, gee, it’s not really good to day-trade your retirement account,’ ” said Troy K. Saharic, a senior consultant with William M. Mercer Investment Consulting.

In any case, companies are being encouraged by the government to give more guidance.

“I was at an event recently where a representative of the Department of Labor was telling companies, ‘Stop thinking of the trouble you can get into if you offer advice and start thinking of the trouble you can get into if you don’t offer impartial advice,’ ” said Patricia Neal Jensen, an executive with Denver-based plan vendor Great West Life & Assurance.

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How does your company’s 401(k) plan stack up?

Here’s a look at five randomly chosen Southland companies and what they’re offering in their plans, recent changes they have made and how some independent investment advisors size up the plans.

Allergan

Irvine-based Allergan, which makes eye-care and skin-care products, has added six funds to its 401(k) plan in the last year.

American Century Stable Asset, Invesco Balanced and American Century Income & Growth replaced funds in the same asset classes, while J.P. Morgan SmartIndex, American Century International Growth and Franklin Small Cap Growth represent new classes.

American Century Ultra and American Funds New Perspective (a global fund), were retained.

Thomas Walton, an employee who has been in the plan since 1981, likes the changes.

“I’ve got the small-cap fund and the index fund now. It’s a better mix,” he said.

Though Allergan’s matching-contribution rate is lower than some other companies’, Walton considers Allergan’s overall retirement program generous, since the company also provides a defined-benefit pension and an employee stock ownership plan. Both programs are fully funded by the company.

Walton’s only quibble is a common one among 401(k) participants: The company match is all in the firm’s own stock.

“All the long-term employees I know are over-weighted in Allergan,” he said.

Two analysts who looked at the plan menu said it could be better diversified.

Despite its name, Franklin Small Cap Growth has become a de facto mid-cap stock fund, said Mark Wilson, a financial planner with Tarbox Equity in Newport Beach. That sort of shift can happen to a small-cap fund whose success brings in a lot of new cash.

Lawrence D. Solomon, statistician for the newsletter No-Load Fund Investor, agreed that Allergan’s plan could use a bona fide small-cap option.

He said the plan also could use a “plain vanilla” index choice, noting that the J.P. Morgan SmartIndex fund, as an “enhanced” index fund, can stray a bit from the Standard & Poor’s 500 as the managers try to beat that benchmark.

Conexant Systems

Conexant Systems, a semiconductor component maker, has kept its plan investment menu the same since its spinoff from Rockwell International two years ago.

But the Newport Beach-based company recently added a variable match, which could pay workers at the end of each year as much as 100% on the first 4% contributed--in other words, doubling the regular match.

The variable match is based on company performance, however, and therefore isn’t guaranteed.

With its immediate enrollment and vesting, Conexant’s plan has plenty to offer even if an employee doesn’t intend to stay more than two or three years, Tarbox’s Wilson said.

Solomon said the plan has a strong menu of choices except in the small-cap area, where Franklin Small Cap Growth, again, is the only option.

QLogic

Aliso Viejo-based electronics maker QLogic Corp. broadened its 401(k) plan’s investment lineup late last year, adding a large-cap value stock fund, a small-cap value fund and a bond fund.

In two years, QLogic has doubled its investment choices to 10.

Wilson said the plan offers a good mix of fund choices, though the four-year full-vesting schedule is a negative.

One investment option QLogic will never add is company stock, vowed Tim Ashcroft, vice president of human resources.

“I’ve gotten requests, but it will happen over my dead body,” he said. “I passionately believe that 401(k) is retirement money, and you never put your retirement money in a single stock. QLogic stock has done very well [over the years], but what happens if it drops?”

Indeed, the stock, which soared more than 20-fold from the end of 1997 through the end of last year, has been taken down to less than half its 52-week high as the tech sector has floundered.

Walt Disney

Burbank-based entertainment giant Walt Disney Co. recently made several 401(k) changes, adding Fidelity Asset Manager, U.S. Equity Index Commingled Pool (which tracks the S&P; 500 index) and MAS Small Cap Value Portfolio, and replacing one of its bond funds with a money market fund.

The fund choices are reasonable, but the enrollment wait--after 1,000 hour of service, or about six months--is a bit long, and the company match--50% on the first 4% invested, all in company stock--is “pretty limited,” Wilson said.

Disney, for its part, said it believes it has a competitive overall retirement package that includes a defined-benefit pension.

Solomon likes the diverse investment lineup in general but said Disney also is missing a “true small-cap” option. MAS Small Cap Value, whose recent stock holdings had a median market capitalization of about $1.8 billion, could be considered a closet mid-cap fund, he said.

WellPoint Health Networks

Managed-care provider WellPoint Health Networks Inc., based in Thousand Oaks, has kept its 401(k) plan essentially the same in the last year.

Wilson views the one-year enrollment wait as too long, but he said the fund choices and company-match policy are strong. WellPoint’s match of 75% on the first 6% invested works out to a maximum of 4.5% of the employee’s contributions, well above the typical 3%.

Solomon said the Vanguard fund lineup makes for an ideal mix of growth and value investment styles as well as low costs, but he said he would prefer an actively managed international fund to the choice of Vanguard Total International Portfolio, an index fund.

Historically, actively managed international funds have had success beating international index funds, he said.

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Times staff writer Josh Friedman can be reached at josh.friedman@latimes.com.

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401(k) Plans: A Southern California Sampling

The typical 401(k) plan offers more than 13 investment options and an employer match of 50 cents on the dollar for the first 6% of employee contributions, according to industry surveys. Here is a look at plans offered by five Southern California companies and major changes they have made in the last year:

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ALLERGAN

* Eligible employees participating: 86% of about 3,000

* Enrollment: Immediate

* Full vesting: 3 years

* Employer matching contribution: 50% on the first 5% invested,* all in company stock

* Stock fund choices: American Century Income & Growth, American Century Ultra, American Century International Growth, American Funds New Perspective, Franklin Small Cap Growth, J.P. Morgan SmartIndex

* Other stock choices: Company stock

* Fixed-income or other lower-risk choices: American Century Stable Asset, Invesco Balanced

* Changes in last 12 months: Six of the eight mutual funds are new. Three replaced similar funds and three others represent new asset types (American Century International Growth, Franklin Small Cap Growth and J.P. Morgan SmartIndex). Internet access added.

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CONEXANT SYSTEMS

* Eligible employees participating: 80% of about 3,050

* Enrollment: Immediate

* Full vesting: Immediate

* Employer matching contribution: 75% on the first 4% invested, all in company stock

* Stock fund choices: Fidelity Diversified International, Fidelity Dividend Growth, Fidelity Emerging Markets, Fidelity Equity Income, Fidelity Freedom series (asset allocation funds), Fidelity Fund, Fidelity Growth Company, Fidelity Mid-Cap Stock, Fidelity OTC Portfolio, Fidelity Spartan U.S. Equity Index, Franklin Small Cap Growth

* Other stock choices: Company stock

* Fixed-income or other lower-risk choices: Fidelity U.S. Bond Index, Fidelity Freedom Income Fund, stable-value option

* Changes in last 12 months: Variable match of up to 100% on the first 4% contributed may be added at year-end, based on company performance (not guaranteed).

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QLOGIC

* Eligible employees participating: 90% of about 650

* Enrollment: Immediate

* Full vesting: 4 years

* Employer matching contribution: 100% on the first 3% invested, none in company stock

* Stock fund choices: Charter Large-Company Stock Growth II (Morgan Stanley Dean Witter), Charter Large-Company Stock Index (Cigna), Charter Large-Company Stock Value I (John A. Levin), Charter Small-Company Stock Value I (Berger Funds), Fidelity Growth Opportunities, Janus Worldwide, Warburg Pincus Emerging Growth

* Other stock choices: None

* Fixed-income or other lower-risk choices: Charter Balanced Fund I-Invesco, Charter Guaranteed Long-Term, State Street Global Advisors Interim Bond

* Changes in last 12 months: Bond fund and two value stock funds added

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WALT DISNEY

* Eligible employees participating: 75%**

* Enrollment: After 1,000 hours of service (about six months)

* Full vesting: Immediate

* Employer matching contribution: 50% on the first 4% invested, all in company stock

* Stock fund choices: Fidelity Asset Manager, Fidelity Diversified International, Fidelity Growth & Income, Fidelity Magellan, U.S. Equity Index Commingled Pool, MAS Small Cap Value Portfolio, Putnam New Opportunities, Sequoia Fund

* Other stock choices: Company stock

* Fixed-income or other lower-risk choices: Pimco Total Return, Fidelity Retirement Money Market Portfolio

* Changes in last 12 months: Added Fidelity Asset Manager, Fidelity U.S. Equity Index Commingled Pool and MAS Small Cap Value; replaced a bond fund with a money market fund; added Internet access

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WELLPOINT HEALTH NETWORKS

* Eligible employees participating: 68% of about 11,000

* Enrollment: After one year

* Full vesting: Immediate

* Employer matching contribution: 75% on the first 6% invested, one-third in company stock, two-thirds as elected

* Stock fund choices: Vanguard Explorer, Vanguard Index 500, Vanguard Primecap, Vanguard Total International Portfolio, Vanguard U.S. Growth Portfolio, Vanguard Wellington, Vanguard Windsor II

* Other stock choices: Company stock

* Fixed-income or other lower-risk choices: Vanguard Prime Money Market Fund, Vanguard Total Bond Market Portfolio

* Changes in last 12 months: None

* 75% on the first 2%; 50% on the next 1%; 25% on the next 2%.

**Disney has 120,000 employees but declined to say how many are eligible.

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Source: The companies