Is Your 401(K) Ok?

When it comes to pensions, baby boomers have more and better protection than any previous generation -- contrary to the alarmist views you have been seeing in the press. In 1950, retirement plans covered only 25 percent of the work force. Now it's up to 50 percent. What's different is that, to an unprecedented degree, workers are having to manage their own retirement funds. If their investment choices are poor, their future income won't live up to its potential.

So far, their choices haven't been so hot. In a queer blend of paternalism and laissez faire, employers pick a limited range of investments they think their workers should have. Then they distribute a brochure and let people make of it what they can. "They're giving employees a box of truck parts and telling them to construct a car," complains James Sullivan, a senior manager at the accounting and consulting firm Arthur Andersen. "Not only don't they know how to do it; they don't even have all the right parts."

None of these issues arises in traditional plans. There, the company funds the pension and hires professional managers; retirees get an income for life, the amount depending on how long they worked and what they earned. This type of pension is in modest decline, but it still covered 26 million active workers in 1990, the Employee Benefit Research Institute reports -- almost twice the number in other employee plans.

But center stage is reserved for the nontraditional plans -- both the 401(k)s at private companies and the 403(b)s for nonprofits and many public-sector employees. Combined, these and similar plans covered almost 24 percent of the work force in 1993. Access Research, in Windsor, Conn., estimates their value at $920 billion. Most of the money comes directly from workers' paychecks. With 401(k)s, you can contribute and tax-defer up to $9,240 this year (less at some companies). For each of your dollars, the typical employer adds 50 cents, up to a cap. Companies offer various ways of investing the money, and you have to choose (chart). Each year's contribution is excluded from your taxable income, and your fund accumulates tax-deferred.

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Exactly how much it accumulates depends both on your investment smarts and on the range of funds your company provides. The average 401(k) plan today offers just five funds, says the New York-based consulting firm Foster Higgins. Many offer only three. Their coloring is conservative. It's still rare to find an international fund or one devoted to smaller stocks. Yet any professional manager would include both in his or her arsenal, not only to improve returns but also to reduce the risk.

Companies defend their anemic fare. They say employees don't know how to make good use of the funds they have, let alone puzzle out something new. But if folks are confused, the answer is to enlighten them. And it's hardly fair to the abler investors to dumb down their choices, just so the rest of the work force won't have to learn to think.

When firms do add funds, it's a few at a time. Ralston Purina raised its 401(k) options from four funds to nine in 1992. Last year Equifax went from five funds to eight. Few firms contemplate much larger menus; they're afraid you'll gamble your money away by chasing the hottest funds in the group. But there's no evidence that retirement savers roll the dice on investments they don't understand. To the contrary, when savers aren't sure, they stick with the most conservative picks no matter how many funds the plan offers, says Robert Reynolds, president of Fidelity Institutional Retirement Services in Boston.

Ironically, the most "conservative" plans may in fact contain the highest risks. Here are the dangers employees face and how a company can help:

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Tell the executives in charge of the 401(k) that they have to get workers to diversify. If a majority clings to the fixed-interest option, the plan is doing something wrong.

Let employees manage every dime that goes into the plan -- both their own and the company's contribution. Tell them it's wrong to assume that their company stock is "safe." For years, dazzled IBM employees kept huge amounts of their net worth in their company's stock, riding it up to $174 a share in 1987. Then it fell off a cliff, tumbling to $41 over the next six years. IBM employees still buy the stock, usually in a separate plan. The 401(k) is committed mostly to seven funds that track the market indexes for stocks, bonds and short-term instruments.

Add a range of choices, including the "lifestyle" portfolios. These are asset-allocation funds that offer a mix of investments aimed at conservative, balanced or aggressive investors.

Quit contracting with annuity firms that handcuff employees to their plans. If an investment can't compete, employees should be free to walk.

Talk up the plan on a year-round basis. Hold mandatory seminars. Teach, teach, teach.

The average employee will never grow into a modern portfolio theorist. But employers can do much of this work for them by building better investment plans. There ought to be a law against holding workers responsible for their personal future, then tying one hand behind their back.

Companies are broadening their 401(k) retirement plans, although most still endorse a narrow range of investment choices. Here are some of the popular features and the percentage of plans that offer them.

FEATURE % OF PLANS Employers match your contribution* 83% Loans allowed 74 You can change investments Quarterly 42 Daily 33 Investment choices Growth stock fund 65 Balanced stock-and-bond fund 64 Guaranteed interest-rate contract 61 Money-market/short-term bond fund 59 Bond fund 53 Employer stock 26 International fund 21 *wholly or partly. Source: Foster Higgins

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