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When it comes to 401(k) plans, few Americans know whether they are getting the best deal or not. That's about to change.
The Department of Labor has proposed that 401(k) plan fiduciaries give investors account summaries that state:
- Fees, expenses and any administrative costs such as legal, accounting and record-keeping charges -- in actual dollars.
- Performance and comparable benchmark returns.
- Investment options.
- How to obtain more detailed information, including education and advice.
That's good news. But it also raises questions: What are the features of the best 401(k) plans? What is best in breed? The questions were posed to some of the nation's leading pension and employee-benefit consultants. Here's what they emphasized:
Integration. The best benefit programs tend to give employees an overview of all of their retirement savings, including their traditional pensions, profit sharing, 401(k) accounts and other benefits, such as health care and insurance, said Eric Levy, a worldwide partner with Mercer, a human-resources consulting firm.
Adequacy. It's one thing to save for retirement. It's a whole other thing to know whether you are saving enough money to fund a comfortable retirement. The best 401(k) plans tend to provide participants with "gap analyses" that show them the difference between what they have in savings and what they will need to accumulate to fund their retirement years.
What's more, the gap analyses should show participants how they might have to adjust to realize their goals, be it saving more, investing more aggressively, working longer or perhaps trimming their standard of living now or in the future. Of note, some studies have suggested that just one in five employees is building an adequate nest egg.
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Matching. Matching is a key feature of 401(k) plans. According to Levy, participation rates increase 10 percentage points, from 60% to 70%, when an employer matches a participant's contribution in one form or another. Most large employers realize that. In fact, 98% of 302 large employers surveyed by Hewitt Associates contribute some money to 401(k) plans.
It's hard, though, to get a read on what the best type of match is. But nearly seven in 10 companies provide a fixed match, most commonly 50 cents per $1 up to 6% of pay, according to Hewitt. Hewitt reports that 22% of about 2.5 million employees in its universe contribute below the match threshold, 34% contribute at the match threshold, and 44% contribute above.
"The key is to have a match that supports the right kind of behavior," says Alison Borland, who heads Hewitt's defined-contribution consulting business. Sometimes, she says, it's more important to look at the total dollars a company is matching rather than the percentage.
Freedom to sell employer stock. Lisa Arko of consulting firm Watson Wyatt Worldwide says the best plans, at least of those that use employer stock funds -- including those providing matching contributions in employer stock -- have no barriers to immediate diversification and specific limits on the percentage of a participant's account or contributions that can be invested in employer stock.
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Automatic enrollment, escalation or rebalancing. By far, the best 401(k) plans automatically enroll workers into a target-date or target-risk mutual fund and automatically increase their contributions over time. With auto enrollment, upward of 90% of workers end up saving in 401(k) accounts.
Investment choices. The typical 401(k) plan has 12 to 17 choices, Borland says. But more importantly, the consultants say, the best plans give the right choices to the right people. Target-date retirement funds are most likely the right choice for younger, lower-income employees, while a brokerage window with access to thousands of funds and investments could be the right choice for sophisticated investors and those who might be working with an investment adviser.
Continued: Education and guidance
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