Proposals for 401(k) Reform Fall Short

By KATHY M. KRISTOF

Feb. 17, 2002 12 AM PT

TIMES STAFF WRITER

The Enron meltdown has put 401(k) reform at the top of Congress’ agenda, but experts say the proposed remedies don’t address many of the shortcomings of the suddenly controversial retirement plans, such as low worker participation and high fees charged by plan administrators.

“This whole debate [in Congress] is reactionary to Enron. It is not in any way strategic,” said Dallas Salisbury, president of the Employee Benefit Research Institute in Washington. “It is not in any way focused on what we should do about retirement policy.”

When Enron’s stock collapsed last year, many workers who had overloaded their 401(k) accounts with Enron stock lost the bulk of their retirement savings. In the wake of that debacle, 14 bills have been proposed or introduced in the last several weeks, all aimed at patching up the 401(k)--a 20-year-old retirement savings system that allows workers to set aside savings in tax-deferred accounts.

The various proposals--including one put forth by President Bush--focus on providing workers better education about the intricacies of investing, as well as setting standards for so-called lockdown periods, when participants are barred from transferring 401(k) balances from one type of investment to another. Some lawmakers also want to limit the amount of retirement money workers can invest in company stock and how long they can be required to hold company stock they receive as a matching contribution from their employer.

But the problems with 401(k) plans go beyond what is being debated on Capitol Hill, experts said.

“You are putting up legislative mandates to fix one thing and you are ignoring the broader context,” said Joshua Dietch, consultant with Cerulli Associates, a Boston-based benefits firm.

For instance, at a time when 401(k) savings are becoming the primary source of retirement funds for the majority of American workers, about 20% of eligible workers don’t contribute to them, Dietch said. Many of those of who participate contribute too little, he said, saving such a small percentage of their pay that it’s unlikely to be amount to much at retirement.

Another problem: A significant number of workers cash out their 401(k) accounts when changing jobs, opting to spend their nest egg instead of moving it to their new employer’s 401(k) plan or rolling it over to an individual retirement account. This mistake is especially popular among younger workers--who have the most to gain from long-term tax-deferred savings.

The people who select investment choices for companies’ 401(k) plans--often employee benefit managers--seldom have a background in finance and frequently are ill-qualified for the job, retirement consultant Ted Benna said.

Many plans are filled with mutual funds that feature high fees and poor results, Benna said--an investment disaster in the making.

In addition, plan administrators often saddle workers with too few investment choices, or with poorly chosen funds that prevent workers from properly diversifying their portfolio.

Solutions to some of these problems already are being tested in the marketplace.

To encourage more people to participate in 401(k) plans, about 6% of U.S. companies have launched automatic enrollment programs. In a so-called negative election program, workers are enrolled in their employers’ 401(k) plans unless they opt not to. About 75% of the companies using negative election plans say they’ve boosted employee participation rates, according to benefit consulting firm William M. Mercer.

In an attempt to increase contribution levels, a new program is being tested in which workers can opt to have future pay raises automatically invested in their 401(k) plans, said Shlomo Benartzi, an assistant professor at UCLA who has completed several studies of how employees handle their 401(k)s. At the mid-size manufacturing company where it is being tested, Benartzi said, 80% of those who opted for the program--called Save More Later-- stuck with it through three pay hikes. The effect on savings rates was dramatic--average savings rates rose from 3.5% of pay to 11.6% in 28 months.

To address the lack of diversification, or the lack of interest many workers have in choosing investments, some companies now offer so-called life cycle funds, which automatically spread a worker’s 401(k) savings among stocks, bonds and cash. The percentages vary depending on the participant’s age, savings goals and funds offered.

The Labor Department also recently approved a proposal by Los Angeles-based Sun America Corp. to provide full-service investment advice to 401(k) participants. The plan would allow workers who didn’t want to be responsible for choosing specific investments to check a box opting for a managed account. The managers would create an initial asset allocation based on information such as the participant’s age, assets and contribution rate. An advisor would follow up on a regular basis to make sure the investment mix still suited the investor.

If the government encouraged companies to adopt these programs, it could go a long way toward solving some of the problems now besetting the 401(k) system, investment experts said.

At the same time, experts are hesitant about proposing legislative solutions for a practical reason: Companies don’t have to offer 401(k) plans--or any other retirement plan. If the rules become too onerous or boost corporate liability for their workers’ retirement security, some fear companies will abandon their programs.

“Above all else, I would want to tell Congress to take a deep breath and proceed cautiously,” said James Klein, president of the American Benefits Council in Washington. “We are all still operating in something of a vacuum in terms of knowing what kind of changes might have unintended consequences. There are some real dangers here.”

(BEGIN TEXT OF INFOBOX)

Changing the 401(k)

Here are some of the changes that have been proposed in Washington to improve 401(k) plans--and some of the problems pension experts say are being overlooked.

Proposed changes:

* Limit how much company stock employees can own in 401(k) plans

* Allow employees to sell company stock received as matching contributions

* Require warning of lock-down periods

* Ban executive trading in retirement accounts when lower-level workers can’t

* Improve investment education for employees

* Enhance employee rights during bankruptcy proceedings