The perfect 401(k)
graphic February 13, 2002: 2:35 p.m. ET

Generous matches. Plenty of choices. How does your plan stack up?
By Staff Writer Martine Costello
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NEW YORK (CNN/Money) - You faithfully socked away money in your 401(k) throughout the go-go 1990s and figured you were on track to retire rich. It seemed like a sure thing.

Then came Enron -- a wakeup call for millions of people who realized that 401(k)s, for all their benefits, won't necessarily be the answer to all of their dreams.

In fact, there pretty much is no such thing as a perfect 401(k). Out of about 340,000 plans, a tiny percentage rank as great; many more are average. The rest fall miserably short of what people need to retire comfortably.

"I haven't seen a lot of great plans," said Pat Jennerjohn, a certified financial planner from Oakland, Calif. "What I see are the negatives."

The corporate match

What makes a great 401(k)? For starters, a generous match -- or the "free money" employers contribute to your plan on your behalf.

About 98 percent offer some kind of match, according to Hewitt Associates, a 401(k) consultant in Chicago. Companies typically match about 50 cents for every dollar you contribute, up to about 6 percent of your salary, or 3 percent of your annual pay.

But as Enron showed, all matches aren't created equal. A lot of companies give matches in their own stock, which can lead to a dangerous allocation to just one security. The average 401(k) has about 39 percent in company stock, and many plans -- like Enron's -- have a much bigger percentage (see "The Enron Problem.")

So ideally, you would get your match in cash, enabling you to allocate it according to a plan that makes sense for your situation. But Hewitt found only about 55 percent of companies provide cash matches.

For example, Sun Microsystems is a stand-out because it matches 6 percent of your salary -- in cash -- and you're vested the day you walk in the door, said Dee Lee, author of Let's Talk Money.

And Intel this year is contributing 8 percent of an employee's salary into the company's profit-sharing plan -- it's not in cash, but goes into an index fund that tracks the S&P 500, another good alternative.

Lots of choice

You don't need a million investing options in a plan to properly spread your bets. But a perfect 401(k) would cover all of the asset classes. That means funds with large-, mid- and small-cap stocks.

It would include growth funds and value funds, and also some international choices.

Rich Zito, a certified financial planner and 401(k) consultant in New York, said plenty of plans fall short. In some cases, there may be only an S&P 500 fund and a bond fund. Or, a plan might have 30 choices but no small-cap or international funds.

"More often than not, there's some deficiency," Zito said.

Some plans also offer funds from only one family, so you're in danger of fund overlap. In many cases, a big fund shop will have favorite stocks that appear in many different funds, so you wind up with a portfolio over-weighted in certain names.

The average number of investing options in 401(k) plans is about 12, according to Hewitt's research. Out of 422 plans surveyed in 2000, 60 percent had 10 to 17 options; 38 percent had six to nine choices, and the rest had five or fewer choices.

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    At Sherwin-Williams, for example, there are 22 investing options in the 401(k) provision of its employee stock ownership plan, said Lydia Bazarko, director of corporate planning. The company upgraded its plan in January after employees requested more choice. The old plan had just two choices.

    "Senior managers thought it was time to diversify," Bazarko said. Among the new options are Fidelity Freedom funds, which are a type of lifecycle funds that cover all of the asset classes, as well as PIMCO bond funds.

    Another issue is cost. Good plans offer funds with reasonable expenses rather than insurance-style annuities. You may also have access to institutional-style funds, which are pools of money that are managed more like a traditional pension account.

    More control

    Lee said a truly great 401(k) allows you easy access to make changes and check on account balances. You can call the 1-800 number on Christmas Day or go online at 3 a.m. to make exchanges or increase your savings rate. On a bad market day, you can dial up the Web site and find out how your portfolio survived the losses.

    If you discover that a mutual fund is too aggressive for your taste, you should be able to change into a safer alternative today -- not three months from now.

    "Not that you should, but you should be able to make daily exchanges if you want," Lee said. Some plans allow you to make changes only at certain times, like once a quarter, Lee said.

    Intel, for example, gives employees the option to make daily changes if they want. "It's their money and they're in charge of it," said Tom Galvin, director of compensation and benefits for the company.

    Of course, few plans -- even the great ones -- allow you to sell your company stock right away. In most cases, you have to wait until age 50 or later to diversify into other investments. According to Hewitt, 67 percent of 401(k)s also have a vesting schedule. The average vesting period is three to five years.

    Is your plan great?

    So how does your plan compare? Chances are good that your plan may have great investing choices but a dinky corporate match. Or, you have a great match -- in company stock. Maybe you can check your account online but you can only change your lineup once a quarter.

    While 401(k)s have been improving year after year, with more choices or better flexibility, few plans cover all of the bases. That means you'll have to fill in the blanks with your IRA, Social Security and other long-term savings.

    "Maybe 10 percent of plans are great," Lee said. "The problem is it gets expensive. Every time a plan adds something, the plan has to pay for it." graphic

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