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Plans Are Improving When It Comes to Educating Participants, Monitoring Funds
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By Clifton Linton
Senior Writer, mPower |
If you're looking at a dwindling 401(k) balance, it may
be hard to rationalize that your plan is probably better today than it was in the past.
But as several studies show, in the last year employers have continued to improve their
401(k) plans.
Many improvements are comparable to shoring up the
foundation of your house — hard to see, but needed. Employers seem to be focusing
their efforts on fiduciary improvements, such as developing investment policies and
conducting fund reviews, that aren't obvious to participants. As a fiduciary, your
employer is responsible for designing a plan in your best interest.
One aspect of stepped-up fiduciary attention that employees
likely will see is greater education about saving and plan usage, and possibly even
advice on how to invest your money. Changes to 401(k) rules slated to take effect in 2002
will need to be explained to participants, which will probably spur employers to increase
their education efforts.
"I think efforts ... certainly in the last six months
have been heavily pointed toward education for participants ... and less on benefit
improvements," said Laurel Cochennet, retirement consultant with William M. Mercer
Inc.
Here's our look at the common features available in today's
plans and what's ahead for plan participants.
Fiduciary Responsibility
One part of employers' fiduciary responsibility is using
defined methods for choosing funds. One way employers formalize these methods is by
drafting investment policy statements listing the criteria they use to add or remove funds
in a plan. In 2000, 57 percent of surveyed plans had investment policy statements said
William M. Mercer's Survey on Employee Savings Plans, 2000-2001, which surveyed 252
plans.
Beyond that, employers need to monitor funds. Eighty-eight
percent of plans reported evaluating the investment performance of their funds in 2001,
compared to 86 percent in 2000, concluded the 2001 Annual 401(k) Benchmarking Survey
by Deloitte & Touche and Pensions & Investments.
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| "I think efforts ... certainly in
the last six months have been heavily pointed toward education for participants ... and
less on benefit improvements." |
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| — Laurel Cochennet, retirement
consultant with William M. Mercer Inc. |
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These steps can limit an employer's liability in the event
of a lawsuit, and they also create a better-managed plan, with better-performing
investments.
For employees participating in these plans, that means
"while they may not like what they see in their quarterly statement ... if the
employer is paying attention to the plan and applying good governance, the news could be
worse," Cochennet said.
Back to School
Another aspect of fiduciary responsibility is ensuring that
employees use the plan appropriately. That doesn't mean finding investments that never
suffer a loss. It does mean giving employees enough education to ensure that they
are enrolling when eligible and saving at the appropriate rate. Some employers go a step
further and guide employees to develop asset allocations.
Also spurring this drive for improved communication and
education are new 401(k) rules scheduled to take effect Jan. 1, 2002.
"The 'how to invest money' is not the focus. It is how
to manage your plan correctly. Making sure you are in ... saving ... rebalancing,"
said David Wray, president of the Profit Sharing/401(k) Council of America.
As employers collect data on worker behavior, they will be
able to target their messages. For instance, in 2002, a new tax credit will be available
to low-income workers who contribute to their 401(k) plans. Armed with payroll data,
employers can target eligible workers and encourage them to consider enrolling or stepping
up their contributions.
One area where employers have historically been reluctant
to tread is providing investment guidance and/or advice, because they have worried about
the potential liability it could create. But that's changing. A few years ago the
Department of Labor stated that employers may hire advice providers, who may assume the
liability for that advice. Currently, 18 percent of 423 plans responding to a Hewitt
Associates survey offer investment advice and another 18 percent plan to offer advice in
the next 12 months, according to Hewitt's, Trends and Experiences in 401(k) Plans, 2001.
Common Plan Features
But, many aspects of 401(k) plans remain unchanged, and
these are features that still concern many workers.
One caveat: no two 401(k) plans are exactly alike. Hence,
you should be cautious when comparing your plan to your neighbor's.
Eligibility. At one time, employers looked at
401(k)s like pensions and required workers to put in several years of service before
becoming eligible to participate.
As 401(k) savings are built through salary contributions,
these lengthy waiting periods caused workers to miss early savings opportunities.
Recognizing this, employers have been shortening eligibility periods.
Of 348 employers surveyed by the Profit Sharing/401(k)
Council of America, in its 2000 Eligibility Survey, 37 percent allow employees to
sign up for the plan in their first month of employment. That was up from 24 percent of
plans in 1998.
One related trend is the growth in the number of plans
adopting automatic enrollment programs, where new employees are automatically signed up
for the 401(k) plan and their contribution rate and investments are pre-selected. The most
common default contribution rate is 3 percent of salary, the PSCA found in its
Automatic Enrollment 2000 mini-survey. Employees who don't wish to participate must opt
out of the plan.
About 14 percent of surveyed plans offered automatic
enrollment in 2001, up from 11 percent in 2000, according to the 2001 Annual 401(k)
Benchmarking Survey by Deloitte & Touche and Pensions & Investments.
Company match. One of the biggest incentives for a
worker to participate in a 401(k) plan is to get company matching contributions, if
offered. In 2001, over 70 percent of plans offered some kind of employer-matching
contribution, said the PSCA's 44th Annual Survey of Profit Sharing and 401(k) Plans.
In 1995, the figure stood at 54 percent.
That said, some companies announced plans to stop making
matching and profit-sharing contributions in 2001. But, this may be temporary, brought on
by the slumping economy.
"My guess is it is" temporary, said Martha Priddy
Patterson, analyst, human capital advisory services, with Deloitte & Touche.
"Otherwise the employers will have some very unhappy people."
The most prevalent match is 50 cents on the dollar on the
first 6 percent of pay, the PSCA said.
Investments. Over the past few years, one of the
most significant changes to 401(k) plans has been the growth in the number of investment
options. In 2001, more than 61 percent of plans offered 10 or more funds, the PSCA said.
Comparatively, in 1995, 64.8 percent of plans offered between four and seven investment
options.
Still, there are two types of 401(k) participants for whom
this isn't enough.
For investment-savvy 401(k) micro-managers, not happy with
a dozen or more funds, the 401(k) industry has come up with the brokerage window. It
allows the plan participant, for a fee, to select from hundreds or thousands of funds or
other investments outside of the normal offerings. In 2000, about 12 percent of 401(k)
plans offered brokerage windows, the Mercer study said.
For participants who would rather have someone else make
investment decisions, the mutual fund industry has responded with lifestyle funds. In
these, professional money managers invest the contributions based on a participant's
intended retirement date and perhaps their investment risk tolerance level. About 29
percent of 574 plans surveyed offer these funds, the Deloitte study said.
Loans. One of the leading features that draw in
401(k) participants is the ability to take a loan or an emergency hardship withdrawal. The
PSCA reports 85.6 percent of 401(k) plans offered loans in 2001 and 88.7 percent offered
hardship withdrawals. While these are handy features, plan participants need to remember
that taking a loan or hardship withdrawal can hinder their ability to reach their
retirement goals.
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The information provided here is intended to help you understand the general issue and
does not constitute any tax, investment or legal advice. Consult your financial, tax or
legal advisor regarding your own unique situation and your company's benefits
representative for rules specific to your plan.
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