Is your 401(k) plan a clunker?

By Tim Middleton

First the good retirement news: New legislation makes it likely more Americans will be swept into the 401(k) system, providing greater financial security for them and a profit windfall for the financial-services industry.

Now the bad news: This doesn't help you out one bit. You're already in the system, and for you, nothing has changed. Unless you're in a gold-plated plan -- and even in the Fortune 500, that can't be taken for granted -- you're stuck with a tin cup.

"The 401(k) industry is a racket," asserts Joshua P. Itzoe, a principal of Greenspring Wealth Management in Towson, Md. It's rigged in favor of employers and investment firms with fees that are excessive, investment alternatives that are lousy and with nobody around to help employees avoid dumb mistakes.

And corporate plans are Hertz compared with the rent-a-wrecks available to the public and to employees at nonprofits, including a large number of teachers. Their plans, known as 403(b)s, often feature "horrific fees and terrible choices," says Steven Podnos, a principal of Wealth Care, a planning firm in Rockledge, Fla.

Below, I'll give you a checklist of questions to ask to see if your plan is a loser and a set of steps to fix what's broken. First, a bit of background of how corporations and the government created the mess.

Shirking responsibility

Retirement benefits of some kind are a tradition in the United States. But they are voluntary, and businesses with fewer than 100 employees are least likely to offer them, according to David Wray, president of the Profit Sharing/401k Council of America. He says big corporations began decamping from pensions in the 1980s, claiming government regulation made them too expensive and unpredictable.

Defined-contribution plans like 401(k)s can cost employers nothing, although many companies subsidize their expenses and offer to match a portion of employees' contributions. Until last year many workers, especially young and poorly paid employees, never even enrolled in the plans that were available.

The Pension Protection Act of 2006 changed that by allowing plans to enroll employees automatically and to gradually increase their contributions unless employees specifically opt out. It also allows employers to offer more investment guidance.

A huge fraction of 401(k) participants know nothing about investing and have tended to choose the worst options -- low-yielding stable value accounts and risky company stock. Since last year, more and more plans are offering target-retirement funds and making them the default for new enrollees.

• Video: The ABCs of mutual funds

This is good because it gives plan participants a better shot at making significant investment earnings, and therefore creating more retirement income. "You automatically go into an age-appropriate asset allocation, and that allocation will change over time, better balancing the risk and return of the portfolio," says Jamie Cornell, senior vice president of Fidelity Employer Services, the largest operator of 401(k) plans.

I wrote about target-retirement funds recently. They can be an excellent one-stop solution for people who don't want to manage their investments personally.

How bad is my plan?

None of this benefits participants in existing plans, except the possible addition of target-retirement funds. And none of this speaks to the quality, economy and knowledgeable management of a company plan. There you're on your own.

Continued: 4 questions to ask

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