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How Good Is Your Company's 401(k) Plan?

BrightScope, a company that analyzes company retirement plans, is out with its annual ranking of the 30 best 401(k) plans. Great news if you happen to work for Southwest Airlines, Amgen, United Airlines, or any of the other 25 large employers on the list. Your company didn't make the list? Well, a new survey of 401(k) plan sponsors offers some encouraging news that your 401(k) plan might indeed get better in the coming years. According to Deloitte, 401(k)plan sponsors (i.e., your employer) rated employee "retirement readiness" as the most important improvement they want help focusing on.

And help is definitely needed. Deloitte reports that employers think just 15 percent of their employees are indeed on track to have enough to last them through retirement. Yikes. That's even more dire than a recent analysis that said nearly half of baby boomers are at risk of running out of money to cover basic living expenses in retirement.

Picking through the data in the Deloitte study, I saw plenty of ways employers could in fact do a hell of a lot better job helping employees plan for retirement, including these:

  • Provide context. Deloitte took it as a positive that 62 percent of the more than 600 plan sponsors in the survey say it is their responsibility to take an interest in whether employees are tracking towards a comfortable retirement. But I find it alarming that 38 percent still feel no compunction to provide education and tools to help employees understand what their current lump sums might generate in retirement.

A new study by the Center for Retirement Research at Boston College proves that a little education or nudging can go a long way to getting employees to consider tactical changes to improve their retirement preparedness. Researchers zeroed in on 401(k) participants in 2009 whose balances were still down at least 10 percent from their pre-crisis highs. Forty-three percent of the participants said that despite their losses, they had no plans to work longer or save more for retirement. Then the participants were presented with this hypothetical tradeoff to ponder: "If the financial decline is not reversed, the loss in retirement savings means households must: save more; work longer (retire later or work in retirement); and/or have less in retirement (spending less or leaving less as an inheritance)." As a result, the percentage of participants planning to neither work longer or save more shrunk from 43 percent to 5 percent. Moreover, the percentage saying they were going to commit to both delaying retirement and increasing their savings rate swung from 9 percent to 51 percent.

  • Don't make auto-escalation elective. According to Deloitte, of the plans that offer an automatic feature that raises an employee's contribution rate at a predetermined time (either annually, or when a raise occurs), 53 percent make it an elective feature for participants to choose. Not only should every plan offer the automatic escalation feature, but it should be an opt-out, not opt-in, feature. The resounding evidence is that once employees are signed up for auto escalation, they don't blink. Given that the average deferral rate is just 4 percent to 6 percent of salary, clearly many employees need the nudge to save more.

  • Allow immediate participation. Just 58 percent of plans allow new hires to start contributions from the get-go, and more than 1 in 5 plan sponsors still require new hires to wait a year before they are eligible. That's a lot of lost time for savings. And coming off of this recession when many new hires will likely have already suffered plenty of lost savings time because of a layoff, allowing immediate access becomes even more important.
  • Bring down expenses. More than half of plan sponsors (55 percent) said they were unaware of their plan's overall weighted expense ratio. In this age of diminished return expectations, what participants are losing to expenses takes on an even larger role in their savings success. If you want to help your employees with retirement readiness, make sure you provide solid, inexpensive fund options. As the New York Times Bucks blog points out, most of the top-rated 401(k) plans in the BrightScope survey offer not just one index mutual fund, but a menu of them.
What to Do While Waiting For Your Plan to Get its Act Together
Here's to hoping that in 2011, more plan sponsors do in fact give their 401(k) plans a serious check-up and make any necessary changes to help participants prepare adequately for retirement. But let's be real. Plenty are only going to give this lip service. Others will need time to carefully sort through their options, get a corporate sign-off, and implement the changes. You, on the other hand, can do plenty right now to improve your retirement readiness:
  • Earmark your 2 percent payroll tax break for 2011 for your 401(k). A provision of the new tax bill gives all of us who pay into the Social Security system a 2 percentage point break in 2011, with our required contribution rate drops from 6.2 percent to 4.2 percent. Come on, no excuses here. You can increase your contribution rate into your 401(k) by those 2 percentage points without seeing a drop in your paycheck compared to 2010.
  • If you're not able to contribute yet to your 401(k), focus on an IRA or taxable account. If you're just back to work and can't yet begin to contribute to your company's 401(k), set up an automatic transfer from your checking account into an IRA account. Once you hit the $5,000 annual contribution limit ($6,000 if you're at least 50 years old), keep saving more in a regular taxable account. If you invest the account in an Exchange Traded Fund, you typically won't have a tax bill until you sell the shares, making it a solid way to keep the bulk of your money growing for retirement.
  • Focus on the low-cost funds. If your plan is full of a bunch of clunker funds with poor relative performance and/or high fees, scout around for the best of the lot. If you have other retirement funds outside of your 401(k) -- say in IRAs, or rollover accounts -- you might consider piling most of your money into this best-of-the-lot fund. There's no need for each individual retirement account you have to be an elegantly diversified, age-appropriate mix of stocks/bonds/cash. All that matters is that your overall retirement portfolio, in total, makes sense allocation-wise.
  • Get the BrightScope survey in the hands of your plan's decision makers. If your employer is serious about walking the walk to help you prepare for retirement, the folks in HR or the retirement plan committee on the Board of Directors should be willing to learn a thing or two from BrightScope's winners. In addition to offering low-cost index funds, plenty of BrightScope's top-rated plans also offer generous matching contributions. Aramco, for instance, matches 100 percent of the first 9 percent of employee contributions; the more typical match is 50 percent on the first six percent. That could be an interesting conversation starter.
Photo courtesy Flickr user RambergMediaImages
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