401(k)s Getting More Scrutiny
It’s a tough call to say who’s more worried about company retirement savings plans: the 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 under-saving.
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 have the effect of making more people think about raising their savings levels, or about allocating assets more intelligently among 401(k) plan choices.
Those choices have become much more diverse over the last decade, which is another reason employees ought to take a fresh look at their plans.
For the company managers who are 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 firm 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 in Chicago, an association of firms that offer the plans.
The mutual fund industry scandal heightened the urgency for a closer look at the programs, Wray and other experts say.
Funds are the primary investments offered in company-sponsored retirement plans. The allegations 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 many more questions about the portfolios they offer workers.
The stance taken by the federal Department of Labor, which oversees retirement programs, is that “employers have the specific obligation to consider the reasonableness of fees,” said Betsy Faber, who heads the 401(k) plan unit in the Western U.S. for consulting firm Mercer Human Resource Consulting in Los Angeles.
There’s another issue that’s enhancing the importance of 401(k) and similar so-called defined-contribution retirement plans: There have been more than a few 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 say they haven’t put enough money away for those plans. By contrast, there is no questioning the nearly $2 trillion that’s 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 assure a decent retirement for plan participants?
Many factors will determine the growth rate of 401(k) sums, including, of course, what happens with the stock market in the next decade. But the quality of the investment options in the plans, the rate at which employees contribute to the plans, and how much of a matching contribution, if any, their companies make also will be key to the growth of 401(k) balances.
If you’re covered by a 401(k) or similar plan, how can you tell how well it stacks up?
Some recent surveys offer benchmarks for comparison of major plan aspects. Here are some of them:
* 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 that 26% 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, for example.
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% and 8% of their annual salary in their 401(k) plan, the Deloitte survey showed. Plan rules vary on maximum permitted contributions, but most people could save a lot more than they do, if they were willing to make sacrifices by reducing their consumption.
About 70% of companies in the Deloitte survey made contributions to employees’ accounts. Some match employees’ contributions dollar for dollar, others pay in some percentage of what workers put in.
Historically, many publicly traded firms have made their 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 firm goes the way of the dinosaurs.
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.
Even so, consulting firm Hewitt Associates’ monthly survey of 401(k) assets held by 1.5 million workers showed 25% of the assets were in company stock as of December. Many financial advisors argue that that is too high a percentage for most investors.
* Plan review. More than 80% of companies in the Deloitte survey said they had formal procedures for reviewing the performance of mutual funds in their plan. Fifty-five percent said they benchmarked their fund options quarterly, up from 47% the previous year.
Many retirement-plan consultants say they expect plan managers will be paying much more attention this year to mutual fund management fees and to overall plan expenses.
Although about 60% of companies in the Deloitte 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 that cost comes out of employees’ returns.
Leslie Smith, one of the authors of the Deloitte study, said survey results suggest that many companies don’t yet have a grip on the total costs of their 401(k) plans, including management fees, the trading costs that fund managers incur and other expenses that may be invisible to investors, but in the long run will reduce investment returns.
If employees begin to ask more questions about plan expenses, it will speed the review process, consultants say.
* Investment education. How much money should you have in stocks versus lower-risk investments? How much does someone need to save to assure a happy retirement? Questions like those can perplex many workers.
The Deloitte survey found that 36% of companies offer all employees customized investment advice. Why don’t more do so? Most that don’t cited “potential liability” -- meaning they feared being sued if advice turned out to be harmful.
But Deloitte’s Smith said one trend among smaller companies is to provide more generic help -- for example, by having company representatives call employees directly and explain plan basics and the importance of saving.
Sometimes, a little bit of help with personal finance can go a long way.
Tom Petruno can be reached at email@example.com.