Griping is an American office tradition, but even the whiniest workers don’t seem to spout off much about their 401(k) plans.
With the stock market on a tear for most of this decade, rising account balances bring smiles and fantasies of early retirement more often than complaints to the boss.
But not all plans are created equal, and because the money you contribute to yours likely will provide a big chunk of your retirement income, it’s worthwhile to do a quality check. These plans, to which employees contribute, more and more are replacing traditional pensions in which the employer promises a specific benefit at retirement.
If you’re not happy with your plan, you have a shot at making it better, so retirement plan participants of the world unite! Take a good look at your plan, whether you have a 401(k) from a corporate employer, a 403(b) from a non-profit or some kind of government-employee plan, such as a 457.
Increasingly, companies are responding to employees’ suggestions.
“What’s happening is people’s 401(k) balances are getting fairly large . . . and they’re paying more attention and they’re speaking up, as they should be,” said Sue Stevens, a financial planner for Chicago investments researcher Morningstar Inc.
While plenty of employers offer good plans, some are just so-so and a few are outright ripoffs, according to retirement-plan experts. You may need to make a few phone calls to get the data you need to figure out where your plan stands, though your company should provide most of it at least once a year.
Start by reviewing your plan’s investment options, which are usually in the form of mutual funds or annuities.
The average plan offers nine choices, said Katherine Hopkins, executive vice president at Fidelity Institutional Retirement Services Co. Just a few years ago, most plans included just a stock, bond and money-market or similar option, such as a guaranteed investment contract.
More and more companies are adding small-company stock funds and international funds to help employees better diversify their portfolios, though. Over the long run, many investment experts believe such choices help smooth out the ups and downs of the stock market.
Many plans fail to provide a good bond choice, said Morningstar’s Stevens. A typical plan includes only a long-term bond fund, which invests in bonds that mature in 10 years or more.
But long-term bonds, contrary to popular belief, don’t smooth out the ups and downs of the markets much. You really need a bond fund with a shorter maturity, of, say, two to seven years, to lessen volatility, Stevens said.
If you think your choices are lacking, start by contacting your human resources department. Ultimately, you want to know who is responsible for choosing which mutual fund company or investment manager provides your employer’s plan.
What if your plan offers a certain kind of fund but it’s a laggard in its class? You can push for change, but if that doesn’t work, you may want to consider skipping that option and investing in a fund outside of your plan if you have extra money, Stevens said.
Don’t let tons of choices reassure you that the plan is a good one. Often, funds are added with little thought, and dogs are allowed to stay in the pack.
“I’ve got clients where there are 50 choices,” said Joseph Hessenthaler, a principal in the Philadelphia office of Towers Perrin, the benefits consulting company. “I do question whether too many choices at some point may not be any good.”
Morningstar’s Web site, www.morningstar.com, lets you type in the name of any fund and gives you comprehensive cost information. Much of the site is free, but you must pay $9.95 a month if you want specific fund reports. A new site, www.financialengines.com , will pick the best choices for you for $15 a quarter.
Once you have gotten a grip on choices, consider costs.
“The lower the fees the participant is paying,” said Benjamin Brigeman, who manages retirement plan services for Charles Schwab, “the less time they need to save to reach their retirement goals.”
A participant who contributes $10,000 a year to a retirement plan and earns 9 percent a year would have $1.923 million at the end of 30 years if the plan provider charges half a percentage point a year, said Steve Butler, president of Pension Dynamics Corp. in Lafayette, Calif. But if the provider charges just 1 percentage point more a year, the employee will have only $1.57 million, a difference of more than $350,000.
Your biggest cost is probably the expense ratio of the funds in your plan. The prospectus for the fund should list this. You might pay the provider as little as one-third of 1 percent for a bond fund but about 1.5 percent for a foreign stock fund. The average of the expenses charged for all the funds is usually about 1 percent, but Stevens said a a more reasonable charge is about half that.
Pay especially close attention to costs if an insurance company provides your plan, said Catherine McBreen, head of retirement consulting at Spectrem Group. They often tack on annuity fees of an extra 1.25 percent or more a year, she said.
Some providers also charge administrative fees per participant, though employers sometimes pay for that.
Employers considering starting a retirement plan or changing to a different provider need to be careful, too, said John Bernard, an employee benefits lawyer with Ballard, Spahr, Andrews & Ingersoll. Often, employers choose a plan, then want to switch to another provider, only to find that their current provider will charge them as much as 7 to 8 percent of the plan’s assets as a redemption fee.
“People seem to have signed the agreements without being aware of these fees,” he said.
On the plus side, more plans are offering easy-to-understand statements and advice that help participants invest well. A recent study by consultants Hewitt Associates found that 41 percent of plans offer individual investment counseling. Many plans also counsel participants via computer programs on the Internet.
A good employer should listen to your concerns, but you have other options if you’re not satisfied with your plan. You may decide, for example, to emphasize contributions to your spouse’s plan if it’s better than yours, Stevens said.
You can also vote with your feet.
“If all else fails, change jobs,” Stevens said. “I’ve turned down opportunities because they didn’t have a plan or the benefits package just wasn’t there.”
MORE INFO AVAILABLE ON THE INTERNET
The Internet offers various sites that provide helpful information on 401(k) plans. Here are four of those sites:
– The 401(k) Company (www.the401k.com/faq.html)–Answers question on a variety of matters related to 401(k) plans.
– 401Kafe (www.401kafe.com) –News, tips and useful insights on 401(k) retirement plans.
– 401k Center (401kcenter.com/) –Provides details for employers looking to set up a 401(k) retirement plan for employees.
– PAI Pension Services (www.paipension.com/info401.htm) –Offers 401(k) basics and an investor profile test.
— Knight-Ridder/Tribune
