Watch for the New and Improved 401(k)s

By Martha M. Hamilton
Sunday, October 21, 2007

What's in your 401(k)?

Chances are that whatever it is, your options may change soon as employers try to come up with ways to improve their offerings to workers.

Two trends are driving the shift. One is litigation by employees complaining that fees are too high or that they have been misled into holding too much corporate stock. The other is the concern that workers may not be earning enough through their investments to provide a decent retirement income -- especially as retirement savings plans supplant, rather than supplement, traditional pensions.

The number of different investment choices in retirement savings plans appears to be leveling off in the high teens, and even that number may be misleading since some of the offerings are just variations on the same life-cycle theme. Life-cycle or target-date funds adjust from more aggressive to more conservative based on the participant's age. So an employer may offer life-cycle funds with different retirement dates -- for example, 2010, 2015, 2020 and 2025.

"On average, plans that offer target maturities are offering seven funds in that mix," said Pamela Hess, director of retirement research at Hewitt Associates. "If you strip that out, the average number of offerings is only about 12."

Employers have begun turning away from offering larger numbers of investment alternatives because they found that too many choices caused some employees to freeze and to stash their money in easily understood money-market funds, where it earned low returns. "We see so many people who say, 'I'm going to make this decision now, and I'll revisit it in 60 days.' Six years later, they still haven't done anything," said Jamie Cornell, senior vice president of marketing at Fidelity Investments.

Although target funds don't guarantee a financially healthy retirement, they help investors get more diversified portfolios than they might select on their own. Many investors plow almost all their money into conservative investment choices, such as bonds or money-market funds, and barely stay ahead of inflation. Others invest too heavily in risky assets, such as too much company stock.

Five years ago employers "tended to add investment options to allow employees to diversify," but now they're streamlining, said Amy Reynolds of Mercer Human Resource Consulting.

One approach to the best of both worlds is to offer fewer choices, but make one of them a brokerage window. By using that choice, plan participants who want a wider variety of offerings can invest in individual stocks or mutual funds not offered by their employers, although they would pay fees to do so.

In addition to target-date funds, an increasingly attractive option for employers is a type of non-brand-name mutual fund known as a collective fund or a collective-investment trust, which costs less. Fees can take a big bite out of return on investment, which is why some workers have sued their employers over fees they say are too high and not properly disclosed.

Like mutual funds, a collective fund pools investments into a single portfolio. But collective funds aren't open to everyone. They're available only to participants in qualified retirement and government plans. For example, a fund might be available only to employees of a single company. A bank or trust company manager directs the investments. The funds are not regulated by the Securities and Exchange Commission, but they are overseen by banking regulators. Because they aren't sold to retail investors, they save on administrative and marketing costs such as advertising and operating toll-free telephone operations.

One trend that almost everyone applauds is the attempt to prevent employees from investing too heavily in company stock, in some cases by restricting the amount of company stock that employees can buy, said Stephen P. Utkus of Vanguard's Center for Retirement Research.

Hess, of Hewitt Associates, said that about 45 percent of plans offer company stock but that fewer employers limit their matching contributions to company stock.

Employees continue to sue their bosses because they got stuck with stock that suddenly plunged in value. For example, employees of Countrywide Financial claimed that management failed to warn them of the financial problems that resulted from its risky lending practices, causing them to suffer hundreds of thousands of dollars in losses when the company's stock price plummeted. So employers are limiting participation in company stock as a form of litigation insurance.

Other trends we'll see more of in future retirement savings plans include automatic enrollment to help more workers become participants, Roth accounts in 401 (k)s, and some types of annuities offered as options to ensure that participants won't outlive their savings.

Like most 26-year-olds, 401(k) plans are still becoming what they will be.

If you are an individual who has been turned down for long-term care insurance and would be willing to talk about it on the record, please

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