How Worthless is Your 401(k)?

Then there's the money being pulled out of the accounts. In 2008, almost one of every five employees took hardship withdrawals out of their account, and another 23 percent borrowed money from their own fund, according to the Hewitt study. It's hard to tell whether these workers simply needed the cash or were disgusted with the whole 401(k) situation.

Still other questions remain. With balances down, employers cutting their contributions and new estimates showing Social Security is more vulnerable than previously thought, how will workers afford retirement at all? Will vendors - the companies that provide the mutual funds and other investments that appear on employer menus – raise enrollment costs to offset losses due to falling fund balances? Could there be a wholesale retreat from 401(k) plans if the situation deteriorates any more?

Not according to loyal 401(k) advocates who say that every misstep is a chance to learn a lesson and improve on the plans, which, as the preeminent retirement savings system now, aren't going anywhere. "You have events and you respond by improving the system, says David Wray of the Profit Sharing/401k Council of America, an organization of plan-providing employers. "There is a lot of conversation now, but the argument is not about whether there should be a defined contribution system or not, it's how that system should be managed and structured."

The Labor Department has been working on fee-disclosure rules for years; its efforts might be eclipsed by legislation from Rep. George Miller (D-California), chairman of the House Education and Labor Committee. He's sponsoring a bill that would require more transparency of plan fees. His bill would also require employers to include an inexpensive index fund on their menu of investment options. The Obama Administration has talked about requiring employers to enroll workers in 401(k) plans or offer private contributions, but backed off of that plan in its latest budget proposal. Workers whose companies aren't offering any matching contributions may turn to their other tax-favored savings options, such as deductible Individual Retirement Accounts or a Roth IRAs, to amass assets for retirement.

Finally, employees with 401(k) plans have to be more vigilant in protecting themselves, say experts like Chris Lyon, of Rocaton Investment Advisors, a consulting firm which advises employers. In this economically challenging environments, employees should steer clear of funds that are too complex to understand or that make money by lending securities to other institutions, as they may become illiquid. Investors should also monitor their management fees, either by checking funds at Morningstar, or by asking their employers how much they are paying for their 401(k) investments.

Such common-sense cautions aside, most pros remain convinced that employees are best served by continuing to invest in their 401(k) accounts, and by directing much of that investment into stock funds for the long haul. And that appears to be just what we are all still doing. Fidelity Investments, a big provider of 401(k) plans and investments for employers, reported last week that 97 percent of their 401(k) participants continued to make contributions through the first quarter of 2009, and that two-thirds of their contributions were going into stocks and stock funds. A recovering stock market would lift their balances and perhaps their level of satisfaction with the whole 401(k) concept. Who couldn't use a couple of good "501(k)" jokes about now?

© 2009