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It's Time to See if Your 401(k) Measures Up

Retirement: If your firm's program hasn't kept pace with those at other companies, you may be getting shortchanged. A look at five Southland plans.


Is your 401(k) plan up to snuff?

With the stock market facing its worst year in at least a decade, many people who are saving through their employer's tax-deferred retirement plan may be rethinking the investment choices they've made.

Others may just be looking to tweak their portfolio by shifting existing assets or new plan contributions into investment options that they've ignored until now.

But if your 401(k) program hasn't kept pace with the improvements other companies have made in these plans lately, you may find yourself shortchanged.

For the Record
Los Angeles Times Sunday November 5, 2000 Home Edition Business Part C Page 3 Financial Desk 1 inches; 35 words Type of Material: Correction
401(k) eligibility--Walt Disney Co. employees are eligible to participate in the company's 401(k) savings plan after one year on the job, with a minimum of 1,000 hours of service. The waiting period was misstated in a table in last Sunday's edition.

For workers who have access to 401(k) savings plans--or, for teachers and others, 403(b) plans--the assets involved often become their biggest investment aside from their home. The average 401(k) account balance is about $50,000, according to the Profit Sharing/401(k) Council.

Because of the stakes involved, many companies have made changes to their plans in recent years in an attempt to keep workers happy and lure new ones.

Among the major trends: more investment options, much quicker enrollment and vesting, online access and offers of independent investment advice and education.

The changes have been driven by, and in turn are helping to drive, greater worker participation in 401(k) plans--which were named, by the way, for the obscure section of the tax code that permitted their creation in 1981.

The participation rate by eligible employees surged from 38% in 1983 to about 80% at the end of 1999, according to the Profit Sharing/401(k) Council.

The group estimates that 34 million of the 41 million eligible U.S. employees now take part.

The average 401(k) annual savings rate (excluding so-called highly paid workers), has risen to 5.4% of pretax pay from 4.2% in 1991. Companies typically match some percentage of workers' contributions. On average, that match is 50% of the first 6% of employee contributions.

Still, many analysts say companies need to adjust their plan investment lineups to allow for better diversification among asset classes and among mutual fund families.

Perhaps most important, educating employees about investing must be a priority, experts say.

Some of the key areas of change in 401(k) plans in the last several years:

* More investment choices. Investment options in the 1980s were often limited to as few as three per plan. The number of choices has risen steadily in response to investor demand and now averages more than 13 per 401(k) plan, according to a study by Buck Consultants.

Many companies now are offering more than 15 choices.

For the most part, mutual funds dominate the list of plan options. And plan choices rarely are limited to a single fund family anymore.

Still, many 401(k) plans "seem to have a lot of family resemblance, with most of the investment options coming from one fund company," said Tiburon, Calif.-based investment advisor Kurt Brouwer.

The options typically are dominated by the 401(k) services provider chosen by the company--such as Vanguard Group or Fidelity Investments.

Those giants can be cost-effective in administering a plan, but they may not yield the best investment lineup, experts say.

"In the future, plan sponsors will move away from that as participants demand the best vehicles. It's very hard to believe that all the best choices could come from, say, a Fidelity or an American Century," Brouwer said.

For now, plan investment options are evolving into a three-tiered menu, analysts say.

The first tier often is made up of "lifestyle," or asset allocation, funds that offer one-stop shopping for participants who want to keep it simple.

These premixed baskets of stock, bond and money market funds are calculated to meet an investor's risk tolerance or timetable at particular ages.

About 30% of 401(k) plans now use such funds, according to the latest survey by consultant Hewitt Associates, versus 9% in 1995.

Ventura-based Kinko's Inc., for example, recently added a Fidelity lifestyle series to its plan.

The second tier, and still the most common, usually provides "core" options--diversified choices such as money market, domestic stock, foreign stock, and bond funds.

But many plans offer a number of large-cap fund choices but few or no mid-cap or small-cap choices. This year, small- and mid-cap funds have generally fared better than large-cap funds, a trend some experts believe could last for a while.

The third tier is a "brokerage window," giving investors access to hundreds or even thousands of individual investments, including individual stocks. But companies often limit the brokerage window to mutual funds or allow its use with just a portion of an employee's portfolio. Some, though, open it all the way.

There is a price for that level of choice: Brokerage-window users generally must pay trading commissions.

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