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YOUR MONEY | MUTUAL FUNDS

401(k) Changes Mean It's Time to Review

November 17, 1996|CHARLES A. JAFFE | Charles A. Jaffe is mutual funds columnist at the Boston Globe

Chances are you will have new funds in your 401(k) plan within a few years. The funds available now will probably be gone.

It's nothing sinister, but rather a fact of life in a cutthroat business.

About one in every 10 employers will change the company that offers its retirement plan this year, according to Access Research Inc., which tracks industry trends. As the 401(k) business matures, that trend is likely to heat up.

For investors, plan changes mean a lot of paperwork and a little bit of decision making.

"When your employer changes plan sponsors, it's a watershed event that should give you pause to reassess your entire investment strategy," says Burton J. Greenwald of B.J. Greenwald Associates, a Philadelphia industry consulting firm. "These changes usually are for the good, but you will want to know specifically how they affect you."

Plan sponsors are aggressively courting employers, offering lower costs, wider choices and better services, such as dedicated representatives, Internet account access or 24-hour hotlines. Employers, meanwhile, salivate at lower costs and an improved 401(k) plan designed to increase employee loyalty.

Though some companies consult with their work force on what changes might make the 401(k) program better, the vast majority of employees learn that something is up when they get a letter.

"When you find out that a switch is in the works, the central question is 'How does this change my options?' " says Paul Katzeff, author of "The 10-Minute Guide to 401(k) Plans." "That depends on how many funds are offered, the performance of those funds, the types of funds and the rules of the plan."

Start evaluating a sponsor change by looking at the new funds and how they correspond to your current 401(k) offerings. Generally, the new sponsor will tell you how the old choices compare with the new ones in terms of assets, so you can simply transfer your money from one type of fund, say aggressive growth or balanced, to a peer fund in the new plan.

Sometimes a few old choices will still be available along with new ones. An option to buy stock in your employer's company, for example, is generally unaffected by these changes.

But if the new plan includes a broader menu of fund choices, making straight one-for-one switches may not be the best move. You may find it's better to cut the pie a bit differently in order to improve your asset allocation.

"You hope to be getting equal or better choices, but it's basically like enrolling in the plan for the first time all over again and making all of the same decisions on where you want to put your money and how you feel about each fund," says Julie Jason, a partner in the Stamford, Conn., investment advisory firm Jackson, Grant & Co. and author of "You and Your 401(k) Plan."

If you can't find an equivalent trade for your current funds--if the new sponsor's growth offering is worse than its peer in the old plan, for example--be prepared to favor the best available funds in the new program.

"Go with the options that serve your needs," says Katzeff. "If a fund can't deliver the performance you expect from the assets it holds, then it doesn't fulfill your asset allocation in anything but name only. Move toward the strongest sisters in the new plan and adjust your asset allocation, if necessary, by changing other investments."

Even if the new fund choices are lousy, don't stop contributing to a 401(k) program, especially if your company matches some of your contributions.

Having reviewed the funds, check out the rules of the new program, particularly as they pertain to borrowing against your holdings. This is particularly important if you plan to borrow 401(k) money to pay for, say, college tuition; if the rules change and you can't use as much of your money (or if a higher percentage is made available), it could change your strategy.

Last, make sure the transfer goes smoothly, that the money in the old plan makes it to the new one in the proper amounts, divvied up according to your instructions.

And if you have problems, talk to your employer. It has a legal responsibility to educate you about the program and how to make it work for you, and to make sure that any changes made are in your best interest.

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