People always say they want a lot of investment choices in their 401(k) plans at work, but when they get them they often find themselves overwhelmed by the decision-making process.
Take the case of IBM, where workers met in focus groups to discuss the company’s retirement benefits.
IBM’s 401(k) plan has 21 investment choices, and at first the workers said they needed more information to make decisions about allocating their funds, said Jay Vivian, director of IBM’s retirement funds.
But later in the discussion, the workers admitted they felt overwhelmed by the information they already had access to.
“People are dying to make the right decisions, but they don’t want to have to worry about it,” Vivian said.
For a little over a year, IBM has offered employees the hand-holding they wanted through Financial Engines, one of several companies now providing online 401(k) advice, telephone access to financial planners and portfolio management.
The price for the advice generally is $4.17 a month per $10,000 in the retirement account.
Such advice is becoming more commonplace.
Nearly 52 percent of employers offer investment advice on 401(k)s, said David Wray, president of the Profit Sharing/401(k) Council of America.
It is most prevalent in small companies (59.7 percent) and least prevalent in large companies (34.5 percent).
The most common types of advice offered are one-on-one counseling (55.2 percent), Internet providers (50.2 percent) and telephone hotlines (31.9 percent).
An annual survey by the group shows that 22.1 percent of companies last year offered workers access to professional management over their retirement investments, up from 13.6 percent in 2002, Wray said.
Fund companies are not allowed to give advice because the participants’ choices could affect the fund companies’ incomes.
Without advice, many workers have been allocating money based on glossy booklets that contain more colorful graphics than numbers, said Nancy Frank, a certified financial planner with Frank Advisory Services in New York.
“They don’t understand how expense ratios work,” she said. “If it’s a load fund, are you paying the [sales charge], or is the employer paying?”
Many workers don’t even know to ask, she said.
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Moves to make now
Think it’s too early to worry about retirement? Think again.
Some employees find it so daunting that they don’t invest in their 401(k)s, which is the worst investing mistake they could make–worse than choosing the wrong investments, experts say.
Financial writer Walter Updegrave, author of “We’re Not in Kansas Anymore: Strategies for Retiring Rich in a Totally Changed World,” suggests several tips for making the most of your 401(k):
– Sign up now. Getting started just five years late can reduce the size of your nest egg by 25 percent, the difference between having $600,000 or $800,000 when you retire.
– Contribute as much as you can. The 2001 tax law boosts the maximum contribution to $15,000 by 2006.
– Don’t ignore costs. If at age 45 you put $50,000 in an investment that earns 10 percent annually and deducts 1.5 percent a year in expenses, you would have about $256,000 by age 65. The same $50,000 in a fund that deducts just 0.5 percent a year in expenses would grow to about $307,000. If your plan offers retail mutual funds, you can check out their expenses at www.morningstar.com.
– Don’t overdo it on company stock. Unless you have plenty of other assets to fall back on, you’re better off limiting your company stock holdings to no more than 10 percent of your 401(k).
— THE DAILY PRESS.
