{"id":1852,"date":"2012-11-19T09:40:37","date_gmt":"2012-11-19T13:40:37","guid":{"rendered":"http:\/\/web.colby.edu\/eldercare\/?p=1852"},"modified":"2012-12-21T16:08:15","modified_gmt":"2012-12-21T20:08:15","slug":"10-things-401k-plans-wont-tell-you","status":"publish","type":"post","link":"https:\/\/web.colby.edu\/eldercare\/2012\/11\/19\/10-things-401k-plans-wont-tell-you\/","title":{"rendered":"10 Things 401(k) Plans Won\u2019t Tell You"},"content":{"rendered":"

By\u00a0Eli<\/a>zabeth O’Brien\u00a0|\u00a0MarketWatch\u00a0\u2013\u00a0<\/a>Mon, Nov 19, 2012 9:40 AM EST<\/a><\/abbr><\/p>\n

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1. We weren\u2019t meant to carry the weight of your future.<\/strong><\/p>\n

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For more and more Americans, the quality of one\u2019s retirement comes down to the quality of one\u2019s 401(k).<\/p>\n

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That\u2019s a lot of pressure to put on plans that started out as a source of extra cash for individuals who were already guaranteed a secure monthly retirement income. When 401(k)s were first introduced in the late 1970s, most workers still had \u201cdefined benefit\u201d pensions \u2014 retirement plans where employers made all the decisions about what to invest where. Back then, 401(k)s were intended as mere supplements to those plans, says Lee Topley, managing director of the retirement plan consulting group at Unified Trust, a Lexington, Ky., firm that manages the needs of plan participants on behalf of employers. Early contributors to 401(k) plans were mostly high earners, since they had the biggest tax bill and thus the greatest incentive to sock away pretax dollars in the plans, says Greg Carpenter, CEO of Employee Fiduciary, an independent administrator of 401(k) plans.<\/p>\n

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The double-digit interest rates of the early 1980s made it relatively easy for companies to meet their obligations through low-risk bonds, Topley says, but pensions became more expensive for companies as interest rates began to fall and plans had to project for even lower rates in the future. From then on, 401(k) plans, known in the industry as \u201cdefined contribution\u201d plans \u2014 where the financial burden is placed squarely on the employee \u2014 continued to grow, as more companies decided that pensions were too pricey to continue. Today, 401(k)s hold $3.5 trillion of retirement assets, and only 7% of private sector employees with retirement benefits had a pension in 2008, down exponentially from 62% in 1980.<\/p>\n

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2. We have no clue how much cash you\u2019ll need in retirement….<\/strong><\/p>\n

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When it comes to actually figuring out how much to save to live a comfortable retirement, most workers are on their own. And once they stop working, it\u2019s up to workers to figure out how to turn their nest egg into an income stream. Only 28% of employers offer automatic projections of how much retirement income a participant\u2019s 401(k) account might produce, according to a study done earlier this year by MetLife.<\/p>\n

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Instead of providing information particular to a worker\u2019s plan, employers tend to offer online tools to help participants prepare their own retirement income projections. But few workers have enthusiastically embraced the challenge of doing this themselves. Employers \u201cspend all this money on education and tools, and everyone\u2019s just using automatic features\u201d like the default option, says Robyn Credico, a defined-contribution specialist for Towers Watson, a benefits consultancy.<\/p>\n

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3… and figuring it out isn\u2019t high on our agenda.<\/strong><\/p>\n

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Nearly three-quarters of large employers surveyed this year by Towers Watson say they offer a 401(k) plan to help provide for workers\u2019 income in retirement. But when companies were asked to name the top issues driving plan design, workers\u2019 ability to retire came in fifth, behind the competitiveness of benefits within the industry, benefit plan costs, employee attraction and retention, and legislation and compliance. What gives? \u201cIt\u2019s a struggle\u201d for companies to design a competitive plan on a limited budget, Credico says. The burden on employees to provide for their own financial security is huge, and the best advice companies can give is simply to encourage their workers to save, she notes. As an incentive, 91% of the companies surveyed by Towers Watson \u2014 each of which had more than 1,000 employees \u2014 offered matching contributions. Of those, nearly a quarter offered non-matching contributions, meaning the company would set aside money even if the employee didn\u2019t. Still, we\u2019re not talking big bucks: according to the Plan Sponsor Council of America, a trade group representing employers who offer retirement plans, the average company contribution to 401(k) plans is 2.5% of pay \u2014 not nearly enough to provide for the basic costs of living in retirement.<\/p>\n

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4. The system isn\u2019t working for employees \u2014 or employers.<\/strong><\/p>\n

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The aggregate retirement income deficit for all Baby Boomers and Gen Xers \u2014 that is, the amount by which their savings, plus Social Security, fall short of what they\u2019ll need \u2014 is $4.3 trillion, according to the Employee Benefit Research Institute. Clearly, folks aren\u2019t setting aside enough for their post-work lives. The average employee contributes 6.4% of her paycheck to her 401(k),according to the Plan Sponsor Council of America. Advisers recommend 10% as a baseline minimum, and for those who start late (in their 40s or even 50s), 15%.<\/p>\n

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The problem\u2019s not just one for workers, though. Post\u2013financial crisis, companies have noticed a rise in so-called \u201chidden pensioners,\u201d Credico says. These are individuals who can\u2019t afford to retire, but they check out on the job. Plenty of older folks enjoy the stimulation of work, but hidden pensioners punch the clock for a paycheck alone, and their performance suffers for it. The good news is that these laggards are spurring companies to design more effective retirement plans, Credico says \u2014 a self-serving motivation, for sure, but at least it\u2019s ultimately to participants\u2019 benefit.<\/p>\n

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5. Fee transparency? What fee transparency?<\/strong><\/p>\n

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New Department of Labor regulations went into effect this year requiring plan providers to disclose the amount in fees that both companies and their workers pay for their 401(k) plans. The intention was to shed light on notoriously murky 401(k) fees. It\u2019s one of the few instances where the consumer of the product\u2014both employers and employees alike \u2014 often have little idea what they\u2019re paying for, thanks to buried fees. For example, a fund\u2019s \u201cexpense ratio\u201d can encompass everything from marketing fees paid to the investment firm to commissions paid to the broker who recommends particular funds.<\/p>\n

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Disclosure notices went out to employers in the spring and summer; employees got their first disclosures over the summer and this month will receive their first quarterly statements under the new disclosure rules, which will itemize fees deducted from their plan. But critics have been disappointed with the first round. Some statements \u201cdisclosed\u201d a wide range of fees, as in \u201cyour expenses range from 0.25% to 2%,\u201d leaving companies wondering where exactly their fees stood. What\u2019s more, the fees came without any guideposts on industry averages. So even if a company was told it paid, say, 1.25%, executives would have no idea how those fees stacked up against other plans. This is no accident, critics charge. \u201cThey didn\u2019t try to make it plain English and fail,\u201d Employee Fiduciary\u2019s Carpenter says. \u201cThey complied with the letter of the law and made it as gibberishy as possible.\u201d To be sure, some say, it\u2019d be very difficult to arrive an at \u201caverage\u201d 401(k) fee, since there are so many variables, including number of plan participants and type of investments.<\/p>\n

6. You\u2019re losing years\u2019 worth of savings to fees\u2026<\/strong><\/p>\n

Take for example a portfolio that says its fee is 1%, a number that wouldn\u2019t be uncommon. That may not sound like a whole lot. But when it\u2019s chipped annually from your retirement nest egg, the cumulative effect can be significant. A worker who makes $75,000 per year and saves 8% of that annually in a 401(k)would lose 2.8 years\u2019 worth of savings in a target-date fund with a 0.2% fee and 11.6 years in one with a 1% fee, over the course of a career, according to an analysis by Towers Watson. The new DOL fee disclosures were designed to open individual participants\u2019 eyes to this kind of impact, but for now, they\u2019re mainly raising eyebrows mainly among savvy employers, Topley says.<\/p>\n

7. \u2026but things are starting to improve.<\/strong><\/p>\n

The Department of Labor\u2019s spotlight on fees has already pushed plan providers to offer lower-cost options, such as exchange-traded funds, in 401(k)s. Some, like Schwab, rolled out new offerings earlier this year, before the first disclosures came out. \u201cThis is the true trickle down,\u201d says Mike Alfred, CEO and co-founder of 401(k) consulting firm BrightScope. So while plan participants might not take to the streets after seeing how much they\u2019re paying for their 401(k) \u2014 disclosures are hardly going to change the prevailing apathy \u2014 their employers are getting wise to the expenses, and they\u2019re starting to demand better options.<\/p>\n

Indeed, companies\u2019 awareness of 401(k) fees has increased sharply over the past five years, insiders say, and the disclosures may spur further eye-opening. Part of this awareness has come from lawsuits filed against both employers and investment firms over 401(k) expenses. Many of the lawsuits have centered on share classes, forcing plan providers to explain why they\u2019re using an expensive share class when a lower-cost option is available.<\/p>\n

8. Fewer choices doesn\u2019t mean better ones.<\/strong><\/p>\n

Just as drug stores have pruned their shampoo offerings to prevent shoppers from getting overwhelmed, plan providers have recently reduced the number of fund options in 401(k) plans. The number of large employers that offer 20 or more funds declined by 8% from 2010 to 2012, and the number of sponsors that offer nine options or fewer increased by 3%, according to Towers Watson. This is generally a good thing, experts say, since too much choice can indeed lead to consumer paralysis.<\/p>\n

But the choices that remain are still too expensive overall, consumer advocates agree. The average plan has approximately 60% of assets in stocks, according to the Plan Sponsor Council of America. Twenty-five percent of assets are invested in actively managed U.S. stock funds and just 9% are in indexed U.S. stock funds. Actively managed funds, where a fund manager picks stocks in an attempt to beat the market, are more expensive than passive index funds that aim only to mimic market returns.<\/p>\n

\u201cMost people will be better off in indexed funds with costs as low as possible,\u201d says Steve Vernon, president of Rest-of-Life Communications, a benefits consulting firm. But brokers who advise companies on plans often don\u2019t have an incentive to choose the lowest-cost option, since they get compensated through commissions paid out by investment firms for pricier share classes. Companies often don\u2019t realize this and think their broker\u2019s advice is \u201cfree,\u201d since the compensation fee is bundled into the expense ratio, even under the new DOL fee disclosures.<\/p>\n

9. Small business employees are missing out.<\/strong><\/p>\n

Just half of workers in companies with fewer than 100 employees have access to retirement accounts, according to the Bureau of Labor Statistics, compared with 79% of workers in companies with up to 499 workers, and 86% of workers in large companies. \u201cThey\u2019re still not reaching enough workers,\u201d says Chad Parks, founder and CEO of The Online 401(k), a provider of 401(k) solutions for small businesses.<\/p>\n

When they do have 401(k)s, small company employees are likely to pay more for them than their counterparts at big firms, for a number of reasons. Some can be legit: many advisers who consult on 401(k)s get paid a percentage of the plan\u2019s assets, and they need to charge a larger percentage for a plan with fewer assets. And with a small plan, the administrative costs are spread out among fewer people. But this is sometimes taken too far, Parks charges. Some small businesses pay as much as 2.5% for a basic 401(k), he notes. Another reason why small businesses get stuck with a bigger bill is because they often don\u2019t have investment committees who scrutinize the plan on behalf of their fellow employees.<\/p>\n

10. Autoenrollment alone won\u2019t save you.<\/strong><\/p>\n

Automatic enrollment has risen in recent years, placing employees in 401(k) plans even if they don\u2019t opt in. Nearly a quarter of large firms offered auto-enrollment to all employees in 2012, up from just 10% in 2009, according to Towers Watson. While it\u2019s good that employees are forced to save(few who are auto-enrolled bother to opt out), employee advocates say, they\u2019re not saving as much as they should. That\u2019s because companies often deliberately set the default contribution rate low \u2014 generally around 3% of pay \u2014 so they don\u2019t have to match as much, Credico says. Of course, employees can always change their default rate, but few bother.<\/p>\n

Indeed, many workers don\u2019t even know their contribution rate. Vernon conducts regular workshops with plan participants. Recently, he\u2019s been askingroomfuls of them how many read the fee disclosures they gotover the summer, and invariably only one or two hands go up, he says. This isn\u2019t necessarily bad news if those few are vocal staffers who can educate and motivate their fellow employees. But really, no one can afford to be complacent when it comes to planning for retirement, Vernon says: \u201cPeople vastly underestimate how much money it takes to have a lifetime income.\u201d<\/p>\n","protected":false},"excerpt":{"rendered":"

By\u00a0Elizabeth O’Brien\u00a0|\u00a0MarketWatch\u00a0\u2013\u00a0Mon, Nov 19, 2012 9:40 AM EST   1. We weren\u2019t meant to carry the weight of your future.   For more and more Americans, the quality of one\u2019s retirement comes down to the quality of one\u2019s 401(k).<\/p>\n","protected":false},"author":4101,"featured_media":0,"comment_status":"closed","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"ngg_post_thumbnail":0,"footnotes":""},"categories":[40877],"tags":[],"_links":{"self":[{"href":"https:\/\/web.colby.edu\/eldercare\/wp-json\/wp\/v2\/posts\/1852"}],"collection":[{"href":"https:\/\/web.colby.edu\/eldercare\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/web.colby.edu\/eldercare\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/web.colby.edu\/eldercare\/wp-json\/wp\/v2\/users\/4101"}],"replies":[{"embeddable":true,"href":"https:\/\/web.colby.edu\/eldercare\/wp-json\/wp\/v2\/comments?post=1852"}],"version-history":[{"count":1,"href":"https:\/\/web.colby.edu\/eldercare\/wp-json\/wp\/v2\/posts\/1852\/revisions"}],"predecessor-version":[{"id":1853,"href":"https:\/\/web.colby.edu\/eldercare\/wp-json\/wp\/v2\/posts\/1852\/revisions\/1853"}],"wp:attachment":[{"href":"https:\/\/web.colby.edu\/eldercare\/wp-json\/wp\/v2\/media?parent=1852"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/web.colby.edu\/eldercare\/wp-json\/wp\/v2\/categories?post=1852"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/web.colby.edu\/eldercare\/wp-json\/wp\/v2\/tags?post=1852"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}