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Once upon a time, companies provided pension plans for
their employees. Some unseen manager controlled the investment of that
retirement fund for all employees, who had no input. After 40 years or so
of loyal service, the employee was put to pasture with a gold watch -- and
that pension.
Today, no one stays at one company that long, and the ball
is in the employee's court when it comes to retirement planning. Many
businesses provide tax-deferred plans called 401(k)s -- 403(b)s for
non-profits -- with options for the employee. The worker funnels funds
directly from his paycheck into the account and has control over how the
money is invested, but he also assumes more of the risk.
Sometimes, however, a 401(k) plan stinks, and the bloom
fades from an otherwise rosy retirement. While many U.S. employees have
enjoyed blossoming retirement plans during the recent bull market, they
have wilted for others.
With ongoing concerns about Social Security, you might be
interested in taking a closer look at the condition of your retirement
funds. What are some of the things that can go
wrong with your 401(k)?
Poor education
You, the employee, are in charge of your own retirement
planning. That means it's up to you to select appropriate investment
vehicles and make sure they are paying off. That means you have to know
what's going on.
"Probably the biggest problem is lack of education of
the participants," explains Tim Younkin, a pharmacist and
self-educated 401(k) expert in Virginia Beach, Va. "Employers are
required to provide education. But a quarterly newsletter doesn't do the
job. The employer doesn't have the time to educate."
Younkin advises teaching yourself, just as he did. He
recommends books from the "Idiots" or "Dummies" series
about retirement plans or investing. Also, read that prospectus that came
with your 401(k) plan. If you can't find the one given to you when you
signed up, ask your benefits administrator or plan provider for a new one.
"The prospectus tells you what fees they charge and
how the fund is performing," Younkin says. Compare that performance
with another fund, such as the S&P, a weighted index of 500 blue-chip
stocks considered to be benchmarks in the overall stock market.
Poor performance
Some retirement plans have provided minimal returns -- or
even losses -- during recent years. While employees have a lot more
control over how their contributions are invested, they pick from among
funds chosen by the employer or the employer-selected provider. How do you
know if your fund's performance stinks worse than a junior high school
play?
You can bet the provider isn't going to give you the
straight scoop about the plan's profits, Younkin says. He recommends going
on the Internet and seeing for yourself how the funds are performing.
If your plan offers a better-performing fund, move your
money. But if the whole range of available funds stinks, then you've got a
problem. We'll get to that.
Low number of choices
Some 401(k) plans don't give the employee enough options.
On average, employers provide 10 funds to choose from, according to a
survey by Profit Sharing/401(k) Council, a 50-year-old non-profit
organization in Chicago that promotes 401(k) and profit-sharing plans to
increase retirement security.
Having options is important because employees are at
different stages of their lives and have different goals. Young employees
may be looking for aggressive funds, while those closer to retirement may
be happier with bonds. And everyone needs the opportunity to diversify.
Without options, you could be stuck with a low-earning fund.
High fees
Those 401(k)s may be tax deferred, but they're not free.
You pay fees for the funds and probably for the administrator too. While
the percentages may look small at first, fees dig into your future funds.
The difference between a 2 percent fee and a 1 percent fee can mean tens
of thousands of dollars, according to the Department of Labor's 1997 Study
of 401(k) Plan Fees and Expenses.
"Two percent is very high," Younkin says. Check
your prospectus or ask the plan administrator about your plan's fees.
Forced to take company stock
Company loyalty is good -- in theory. That doesn't mean
completely tying up your retirement nest egg with your employer. As hard
as you may be working, that stock may not be a great investment. If the
company goes bankrupt, you're not only out of a job, but out of a
retirement too.
"It's not good to have too much company stock in your
401(k)," Younkin warns. He says other financial experts recommend no
more than 10 percent to 15 percent of your 401(k) should be in company
stock in order to keep your retirement plan from becoming too dependent on
your company's performance.
One exception is if the company is matching
your contributions with stock. If it's free, don't turn it down. Be sure
to have investments outside your 401(k) to balance your overall portfolio.
Here are your options
Even if your company has stuck you with a stinker of a
retirement plan, you have options (though not necessarily stock options).
Lobby your benefits office
Go to your employer and present a case for a better 401(k)
plan. Before you go, be informed and prepared.
"Use my stuff as ammunition," Younkin says. He's
already been through the lobbying battle at his workplace, and has created
a Web site, called 401(k) Help Center -- www.timyounkin.com -- which is
full of 401(k) information and advice for employees.
Team up with other concerned workers.
Your argument will
carry much more weight if it comes from a group. The employer is not going
to make a change to satisfy individual workers.
"It's in the employer's best interest to keep the
employees happy," says William Even, professor of economics at Miami
University in Oxford, Ohio. "One would expect an employer to be
anxious to listen." After all, the boss and the human resources folks
are contributing to the same plan you are -- they ought to care.
If a retirement fund goes sour, who's responsible? Well,
the employer has a fiduciary responsibility to the employees in regard to
the retirement plan. Unfortunately the extent of this responsibility is
still not entirely clear.
"Employers are concerned about that liability and are
looking to the Department of Labor for guidance," Even explains. The
department provides guidelines on what's a reasonable minimum set of
choices. Additionally, it requires the employer to inform employees of the
nature of the plan and the nature of the risk.
Balance 401(k) with other investing
If your retirement plan is just plain lousy with no
matching funds, then you might want to get the heck outta there.
"You may be allowed to withdraw your money and invest
in your own investments," Even suggests. He reminds, however,
"It's up to the employer whether you're allowed to cash out."
Admittedly you won't enjoy the tax-break bonus of a 401(k)
with "outside" investments, but you will control the costs and
choose your own investments. Younkin advises that you talk with a
Certified Financial Planner to find out what investments will work well
for you.
Investing on your own requires willpower and the
discipline to take the money from your salary, invest it and -- most
importantly -- not touch it until retirement. Younkin says if you don't
have that much willpower, then stick with a mediocre plan that invests
straight from your paycheck. It's better than nothing.
However, if your employer provides any sort of matching
contribution, sign up and put in at least the minimum required to get
those free dollars. It's like an automatic return on your money.
"If there's employer matching, even if it's a bad
plan, always participate," Younkin says.
Find a new job
If a stinky 401(k) is one of many issues bugging you at
your workplace, consider moving on. When looking for that next job, you'll
know how to ask informed questions about the retirement benefits package.
When you leave an old job, remember to get your funds rolled out of that
odious 401(k) and into the new one or another tax-deferred option, such as
an IRA.
Changes in retirement plans have put the responsibility in
our hands. Without a fairy godmother protecting these retirement funds,
the big bad wolves of fees and poor performance can get hold of them.
Educate yourself and keep an eye on your 401(k)'s performance, and you may
find yourself living a little more happily ever after in retirement.
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