The 401k, Americans' ticket to retirement, is getting an upgrade. Many plans are already enrolling workers automatically and upping their contributions each year. Soon it will be easier to figure out how much your plan is charging you, whether your target-date fund is aligned with your goals and whom you can turn to for investment advice.
"The next decade will be a turning point for 401k plans," says Chip Castille, the head of defined-contribution plans at BlackRock, the world's largest asset manager.
That's great news for the nearly 50 million workers who rely on 401k plans as their primary -- in many cases, only -- source of retirement savings.
In the meantime, inertia, once the foe of employees who delayed signing up for their company 401k plans or dithered over investment choices, has become their best friend. Despite devastating market losses in 2008, most 401k participants stuck with their investment plans and continued to make regular contributions. As a result, the average 401k balance increased 23% in 2009, and many accounts rebounded to their pre-recession levels, according to a Vanguard study of more than 3 million plan participants.
Q: How do I know whether my 401k plan is any good?
A: Your plan should offer a diversified mix of low-cost investment choices. An employer match is a plus, because employees tend to save more when their company kicks in money. Investment guidance and regular, personalized report cards to show whether you're on track are important parts of a great 401k plan.
A few years ago, Stephanie Banister, the director of finance at Accept, a software company in Santa Clara, Calif., took a hard look at her company plan and didn't like what she saw. She wasn't satisfied with the investment choices, and, despite her previous experience as comptroller of a pension company, she couldn't figure out how much her employer and its employees were paying in fees for their 401k's. The plan's custodian wasn't much help.
So, with her boss's blessing, Banister hired an independent consultant to review Accept's plan and, ultimately, put together a better one. At the time, Accept had only 28 employees, but Banister knew that the startup needed a solid 401k plan as a recruiting tool.
Because of economies of scale, large companies can usually hold total annual fees in their 401k's to below 1% of assets, but smaller plans often pay fees of 3% or more. By switching providers and redesigning the plan, Accept was able to cut the fees its employees pay to about 1.2% annually -- less than half of what they were being charged (not counting a flat administrative fee paid by Accept).
Q: How do I choose the right investment mix?
A: At Accept, employees can choose from five professionally managed portfolios of low-cost index funds. They range from aggressive-growth funds heavily tilted toward stocks to an income-heavy mix for employees near retirement. The plan clearly outlines each portfolio's underlying investments, fees and projected rate of return. All employees have to do is select a portfolio and let the plan's investment manager handle the rest.
Accept now has nearly 50 employees, and Banister, who also acts as human-resources manager, often lectures new hires about the importance of saving for the future.
"If an employee does not want to participate in one of the portfolios, they have to give me a notarized waiver," Banister says. So far, only one has opted out.
Continued: How much of my salary should I be putting away?
