My 401(k): Peach or lemon?
If your retirement plan is less than stellar, there are ways to make it better
NEW YORK (CNNfn) - If you find your 401(k) wanting relative to others out there, the good news is you may be able to convince your company to make some improvements.|
The difference between a winning plan and one that just passes muster depends greatly on fund choice, expense, match, eligibility and vesting policies.
Broaden your choices
The typical 401(k) plan offers between four to nine funds, according to a study by KPMG Peat Marwick. But in experts' views, four is too low and doesn't allow for adequate choice in asset allocation. Such plans, usually the mark of a small company, tend to offer only large-cap, balanced, bond and money market funds.
So you might consider asking your human resources department for more international or small-cap exposure.
Choice in investment style is just as important. "Companies should offer value- and growth-style investing so the employees can choose," said certified financial planner (CFP) Dee Lee, author of The Complete Idiot's Guide to 401(k) Plans.
In Lee's view, a selection of six to 10 funds is usually the mark of a very good plan, especially if the funds come from more than one fund family.
If an employer has to pay anything at all to add a fund, it may be about $1,000, said Josh Dietch, a consultant with fund research firm Cerulli Associates.
Either way, it's not a big deal, said CFP Tom Grzymala, whose firm Alexandria Financial Associates Ltd. helps run a number of 401(k) plans. It's more a matter of what he calls "administratrivia."
Keep track of 'outside costs'
But other administrative details account for much of the cost of running a 401(k) plan, and you could be footing part of that bill without realizing it.
In addition to expenses connected to the funds you choose -- something all 401(k) participants pay -- you may be charged a portion of the fees paid to outside parties helping your employer with the plan.
These include an investment advisory firm such as Grzymala's, which administers the plan, briefs participants and makes recommendations about fund selection. You may also help pay for a third-party administrator like an actuarial, which makes sure all federal regulations governing 401(k) plans are followed.
These "outside costs" will not be broken out on your account statement, Lee said. To find out what you'll be charged, ask your employer for the most up-to-date Summary Plan Description (SPD).
Generally speaking, however, big companies with large plans either foot the entire bill or only charge participants a small portion for such costs, Grzymala said.
What if the funds are lemons?
Maybe your case is different. Maybe your plan offers you more choice than Baskin Robbins and doesn't suck your contributions dry before they're invested. But last year you looked at your funds' returns and thought, "Bull market? What bull market?"
When it comes to performance, your negotiating room is limited.
Your company acts as the fiduciary of the plan, which means it is obligated to provide a variety of responsible investment options and regularly review those options using several criteria, of which returns is only one.
Employers are not accountable for poor performance, especially given that sectors and investment styles fall in and out of favor on Wall Street.
"They don't have to be clairvoyant," Dietch said. "An employee may want (fund manager) Garret Van Wagoner's rocket ship. But some years it's a rocket ship and some years it's the Titanic. The plan sponsor is responsible to put quality in place."
Good plan, but takes forever to vest
And it is the company's right to set the vesting, eligibility and matching policies, all areas in which you may meet resistance from your boss if you ask for improvements.
The most common match on a 401(k) plan is 50 cents to the dollar on a percentage of your salary, which often ranges between 3 percent and 6 percent. An ideal plan, Lee said, would match you dollar for dollar on 6 percent.
A high match, though, may not be as valuable as you think if you're on a 7-year graded plan and only intend to stay for a few years. To walk away with 100 percent of the match, you would need to work at the company through your seventh anniversary; otherwise you only will see a portion of the employer's contribution. Of course, any money you put in is yours no matter when you leave a job.
You can lobby your employer for a shorter vesting period, but if that doesn't work, time your job changes carefully, especially if your 401(k) operates on a five-year cliff, meaning you are 0 percent vested until your fifth anniversary, and then you become 100 percent vested thereafter.
When it comes to eligibility, more than half of 401(k) plans stipulate that you must be at a firm for 12 months before you can participate, according to KPMG. But if your first anniversary doesn't fall neatly within a company's open enrollment period, you may have to wait even longer.
That happened to Lee's son. Together with some colleagues, he managed to convince his new employer to change its eligibility policy by demonstrating how much money, compounded over 40 years, he would lose because he had to wait an extra three months from his 1-year anniversary to participate in the plan.
How to make your case
If you and your co-workers do want some changes made to your 401(k) plan, it pays to remember that the plan is a benefit, not a right. That means the more artfully persuasive you are, the better your chances of getting what you want.
You should start the process by approaching human resources and asking if there are any changes already in the works, Lee suggested.
"401(k)s get put on the back burner because companies are busy with their business," Lee said.
If that's the case, offer to help. One way is to volunteer to serve on the plan's investment selection committee as an employee representative, or to form an employee committee that makes recommendations about the plan.
If the HR department proves unresponsive, "then go to the head man in the shed," Grzymala said. And be sure to put everything in writing.
Look for greener pastures?
Since benefits are such a significant factor in your overall compensation and long-term security, you should scrutinize the 401(k) plans on offer if you're deciding between two positions.
But once you're ensconced in a good job, a less-than-stellar plan is not reason enough to jump ship, especially if a new job means another year until you qualify for a 401(k).
Think of it this way, Lee said: Saving for retirement while getting a tax break and free money from an employer match is not a bad deal. Or, as she put it, "Even a mediocre 401(k) plan is better than none."