The best new features of a rich 401(k)
Here are the 5 best features right now - and the most promising approach to getting your plan to adopt them.
(Money Magazine) -- Over the past year or two, a combo of new government regulations and a chaotic stock market - not to mention the continued slashing of traditional pensions - has spurred many companies to revamp their 401(k) plans in ways that can pay off big-time.
401(k)s offering it: About 25% of employers
Unlike a regular 401(k), the Roth version - permanently greenlighted by Congress in 2006 - lets you make contributions only after the money is taxed. But withdrawals are tax-free. If you'll be in a higher bracket in retirement, a Roth 401(k) can be a better deal.
401(k)s offering it: More than half
Once you've settled on an appropriate mix of stock and bond mutual funds within your 401(k), this service automatically rebalances your holdings back to your desired allocation (by buying and selling funds in your account) once a quarter, typically. And it's usually free.
401(k)s offering it: About two-thirds
Also known as life-cycle funds, they maintain a mix of stocks, bonds and cash that gradually grows more conservative as you draw close to the year you plan to retire (hence the "target date"). When volatile markets throw the mix out of kilter, the fund automatically returns to your original asset-allocation targets. That means you sell investments when they're up and acquire more when they're down - all without lifting a finger.
401(k)s offering it: About 25%
A professional investment adviser will recommend a portfolio of funds that's right not just for your 401(k) but for your investments outside it as well. If you have lots of money parked in different places, this can be a valuable service. Typical annual fee: 0.4% to 1% of your account balance.
Employers offering it: About 75% of those that have cut their defined-benefit pension plans in the past decade
The average mid-size to large company offers a 401(k) match equal to 3% of an employee's pay. But when a big company cuts its pension plan, it tends to compensate by boosting the match by another 1.4% of pay on average, according to benefits firm Watson Wyatt. And about half of those companies automatically kick in the additional money, whether you contribute to the plan or not.
If your 401(k) lacks some of these features, complain. Loudly. While most employers these days are hypersensitive to their legal duty to establish a solid plan, they often need prodding, especially when it comes to optional features. "Many employers just don't think it's worth the effort to add something new if it hasn't yet been widely adopted," says Pamela Hess, director of retirement research at Hewitt Associates. "It's up to you to tell them it's worth it."
Okay, fine, but what leverage do you have? Your most effective weapon is competitive intelligence. Call the HR departments of your biggest competitors and ask them about their 401(k) features. (If their plans are strong, the companies will be happy to tell you because topnotch benefits are good recruiting tools.) Then nudge your employer: "United Widget offers target-date funds. Shouldn't we?" Or "Widgets R Us boosted its match when it closed its pension. My team has begun to notice." You may be able to embarrass the bosses into following suit.
To make your appeal, first call HR to see if any changes to the 401(k) are already afoot. Then put your requests in an e-mail and send it around to your colleagues, encouraging them to sign their names too. Send the e-mail not just to HR but also to your employer's retirement committee, suggests Clare Bergquist, director of 401(k) strategies at Charles Schwab. (Most companies have such committees, which typically meet quarterly and control 401(k) decisions. Ask HR to give you the names and e-mail addresses of the individuals who serve on it.) Then sit back and anticipate the party your colleagues are about to throw you.