Sure You're Secure? How to Spot Flaws in A.401K

Article excerpt

Between 30 million and 40 million workers sleep well at night, knowing that regardless of how well the US Social Security system holds up, there is always a fallback position: the money in their good ol' contributory retirement plans.

Indeed, 401(k) and 403(b) plans have become the bedrocks of the American retirement system. An employee's regular contributions to these plans - often boosted by matching grants from an employer - can provide monetary reassurance for one's twilight years.

Moreover, since most 401(k)/403(b) participants are buy-and-hold investors, they help shore up the US economy. In April, for example, participants tended to make normal contributions to their plans even as the stock market tumbled, according to Hewitt Associates, a consulting-benefits firm.

But unfortunately, many workers' dreams of happy retirement have grown cloudy of late, buffeted by a combination of low returns from shoddy investment choices, inordinately high expenses - and in some extreme cases, mismanagement or malfeasance.

The evidence is overwhelming: Few workers ever bother to check up on the management, safety, and performance of their plans.

Guess what? It's time to do so.

In recent years, most 401(k)/403(b) retirement plans have posted solid gains, reflecting the underlying strength in the US economy and the soaring stock market. But not every company plan has been a success story. Among the problems:

Poor choices. At many firms, the menu of investment products is limited. Often firms offer a choice of only a few mutual funds, a fund based on company stock, or a guaranteed-investment contract (GIC), which pays a preset rate of interest.

An ideal menu should let you tap into a number of mutual-fund families, a GIC, and company stock. "The average menu includes about 11 choices," says Michael McCarthy, a 401(k) consultant with Hewitt Associates. But more than 60 percent of all companies don't offer that many, he adds.

An ideal plan, says Mr. McCarthy, should let you buy individual stocks and bonds through a brokerage house, and provide access to financial planners - often through the Internet.

High expenses. Few employees bother to find out how much their fund administrator charges or how fees are assessed. Experts say fees should generally not be more than 3 percent of assets, if not lower.

Cutting-edge firms seek to lower participants' costs by putting 401(k)/403(b) assets into "institutional" funds rather than commercial mutual funds offered to the public. Institutional funds have substantially lower costs because of their large asset base. Still, says McCarthy, the good news is that, by and large, "administrative costs have been coming down" in recent years.

Limited access. Not all workers can participate in a plan. While some 96 percent of large companies offer them, small firms tend not to have them. Only about one-third of firms employing 100 to 500 workers do, according to Spectrem Group, a research-consulting firm in New York. Only about 13 percent of firms with 100 or fewer employees offer them.

Even those firms with retirement plans sometimes make new employees wait as long as one year before letting them join. Long delays can also occur when a firm is taken over by another firm and a plan is switched to the new employer's plan.

"We've been waiting now for months to hear about our 401(k) options," says Chris Hall, an employee of an electronics firm outside Newark, N.J. His firm was taken over in an acquisition. …