Avoiding 401-Chaos.Which elements of 401(k) plans matter most to participants?
Anybody who's ever been told to "eat your spinach" knows there's a difference between what a kid wants and what parents believe is healthy. Likewise, when employees are offered varying features of 401(k) plans, their perceptions of their best interests may diverge diverge - If a series of approximations to some value get progressively further from it then the series is said to diverge.
The reduction of some term under some evaluation strategy diverges if it does not reach a normal form after a finite number of reductions. from the opinions of the sponsors who select the plans.
While participants may regard 401(k) plans as savings accounts Savings Account
A deposit account intended for funds that are expected to stay in for the short term. A savings account offers lower returns than the market rates.
Notes: with loan access, the government established the system to encourage saving for retirement. Looking after participants' best interests -- which may or may not coincide with their preferences -- is a fiduciary responsibility of the plan sponsors. The challenge is compounded by the range of investor profiles in any given group, not to mention across the spectrum of industries and compensation levels. Moreover, participants are split among those who regard their plans as long-term investment safety nets, and those who would rather manage a portfolio more aggressively. As investing becomes the national pastime, the latter group may fall prey to classic mistakes: inadequate diversification and risk management controls; an overly short-term focus; attempts at market timing. In selecting a plan, sponsors should bear in mind which features will affect the participants, and how.
The first rule of thumb, according to according to
1. As stated or indicated by; on the authority of: according to historians.
2. In keeping with: according to instructions.
3. Kenny Lee Adams Lee Adams (born August 14, 1924) is a Tony Award-winning American lyricist best known for his musical theatre collaboration with Charles Strouse.
Born in Mansfield, Ohio, Adams received his Bachelor of Arts degree from Ohio State University and a Master's from Columbia , a San Francisco-based consultant to plan sponsors, is legal compliance. "Avoid any conflict of interest. For heaven's sake, don't choose your brother-in-law to run the plan!" Laura Van Domelen, a principal at Milliman & Robertson, agrees. As an example of non-compliance, she cites the technicalities of deferral deferral - Waiting for quiet on the Ethernet. percentage tests. While the IRS An abbreviation for the Internal Revenue Service, a federal agency charged with the responsibility of administering and enforcing internal revenue laws. will usually permit an offender to fix the transgression TRANSGRESSION. The violation of a law. , in extreme cases of abuse, the entire plan may be disqualified dis·qual·i·fy
tr.v. dis·qual·i·fied, dis·qual·i·fy·ing, dis·qual·i·fies
a. To render unqualified or unfit.
b. To declare unqualified or ineligible.
2. . Play by the rules to avoid sinking the ship.
As the number of mutual funds proliferates, how wide a choice of investment vehicles do participants want or need? Despite the bewildering be·wil·der
tr.v. be·wil·dered, be·wil·der·ing, be·wil·ders
1. To confuse or befuddle, especially with numerous conflicting situations, objects, or statements. See Synonyms at puzzle.
2. array, most funds break down into a few main categories. Typical classifications provided by most plans are large-cap U.S. equity, index, bond and so-called lifestyle (pre-mixed/asset allocation) funds, and employer stock. Global and emerging market funds are growing more popular, as are individual brokerage, self-directed options. The trustees, or plan sponsors, define an investment policy, based on parameters like risk or types of return, and often rely on investment managers to implement it. "It usually comes down to a strategy of name brand vs. costs," says Michael Sternklar, who runs the benefits outsourcing group for PricewaterhouseCoopers from Fort Lee, N.J. "Some people prefer familiar mutual funds with powerful name recognition, whereas other go for a bargain basement bargain basement
sale of old stock at highly discounted prices. [Pop. Culture: Misc.]
See : Inexpensiveness approach, such as indexing."
Research by Hewitt Associates Some of the information in this article may not be verified by . It should be checked for inaccuracies and modified to cite reliable sources.
Hewitt Associates indicates U.S. employers are boosting their 401(k) plan offerings and providing more investment education. According to Hewitt's 1999 survey to nearly 500 employers nationwide with a combined total of 3.3 million participants and $295 billion in assets, employers are offering more investment options than ever before. Nearly twice as many employer-sponsored plans employer-sponsored plan,
n a program supported totally or in part by an employer or group of employers to provide dental benefits for employees. The plan may be administered directly by the employer or another person or group under a contractual (42 percent) offer 10 or more options than in 1997 (23 percent). On average, plans offer participants 11 investment options, up from an average of eight options in 1997.
Ian Sheridan, vice president of marketing and new business development at ADP's Retirement Service Group, explains that his firm may enable companies of between 1,000 people and 5,000 people to select from 36 funds, although "typically you won't see more than 10 funds at any size corporation."
Finally, individual brokerage options continue to grow "modestly," reaching 7 percent of funds last year, according to Hewitt. Although the more highly compensated participants, such as law firms This list of the world's largest law firms by revenue is taken from The Lawyer and The American Lawyer and is ordered by 2006 revenue:
An arrangement between an investor and a licensed brokerage firm that allows the investor to deposit funds with the firm and place investment orders through the brokerage, which then carries out the transactions on the investor's behalf. may prove "a nightmare from a record-keeping standpoint," warns Van Domelen. Motivations for self-directed investing range from the use (among the well heeled) of a personal financial manager, to a yen for day trading Day trading
Establishing and liquidating the same position or positions within one day's trading. , momentum investing Momentum investing is a system of buying stocks or other securities that have had high returns over the past three to twelve months, and selling those that have had poor returns over the same period. or just old-fashioned stock picking. Again, an investor's ultimate best interests may not be served by the leeway lee·way
1. The drift of a ship or an aircraft to leeward of the course being steered.
2. A margin of freedom or variation, as of activity, time, or expenditure; latitude. See Synonyms at room. to follow the latest hot stock or trend.
Reporting and Administration
"When it comes to information, we try to provide efficiencies across all deliverables, regardless of company size," says ADP's Sheridan. He's describing all the channels of account communication, which include statements (balances), call centers (telephone contact with human beings and menu options) and the Internet. A central benefits department with easy access is also crucial for employees who are terminating. They need correct and timely information for taking distributions or rolling over accounts. Whichever route participants follow, they deserve timeliness, accuracy and content. Most questions and transactions are still conducted by phone or over the web, a sign of a widespread aversion to paper forms. "It really matters whether the line operators are well trained and understand the questions," says Stemklar.
Yet despite paperphobia, statements continue to be the main source of account information. Although 95 percent of plans distribute statements quarterly, actual receipt time can vary between two weeks and six weeks. And different folks seek different strokes in the level of detail. Conscientious types want to check every transaction, while others would just as soon skim to the bottom line, often via a reader-friendly pie chart A graphical representation of information in which each unit of data is represented as a pie-shaped piece of a circle. See business graphics. .
While Internet use is growing, it won't replace all 401(k) reporting, thanks to regulatory requirements. For instance, plan sponsors are responsible for issuing annual printed forms and paper confirmations. And the Internet offers different levels of transactional capability. These start with daily access to account balances, and the capacity to make investments online. "Withdrawals are less common today," explains Diane Talbot, vice president of retirement services at Business Logic, a Chicago-based e-finance solutions provider. The Department of Labor recently issued guidelines on electronic processing, and "whenever money is taken out of a trust, somebody is on the hook Adj. 1. on the hook - caught in a difficult or dangerous situation; "there I was back on the hook"
dangerous, unsafe - involving or causing danger or risk; liable to hurt or harm; "a dangerous criminal"; "a dangerous bridge"; "unemployment reached dangerous for overseeing the legitimacy" of the transaction, she adds. Loans, at least, are secured.
Learning the ABCs
Why am I saving at all? How much do I need to save? How should my age and risk-tolerance profile affect my savings decisions? These are the types of questions plan sponsors answer, along with a host of others on tools for financial decision-making, such as risk/return ratios and investment options. In general, a plan sponsor that both provides education and invests in prudent, reasonable vehicles fulfils its fiduciary responsibilities. Clearly, the wider the universe of potential investment choices on offer, the more educational resources are needed to achieve an acceptable standard.
Sponsors present investment education in a variety of media. Seminars and written materials are most popular, while online, web-based tools are rapidly gaining ground. (Please, no more paper!) In addition, plans teach financial lessons through one-on-one counseling, videoconferencing A real time video session between two or more users or between two or more locations. Although the first videoconferencing was done with traditional analog TV and satellites, inhouse room systems became popular in the early 1980s after Compression Labs pioneered digitized video systems , help lines and interactive modeling software. Content ranges from the most basic principles of Financial Planning Financial planning
Evaluating the investing and financing options available to a firm. Planning includes attempting to make optimal decisions, projecting the consequences of these decisions for the firm in the form of a financial plan, and then comparing future performance against 101 ("What is risk?") to more sophisticated explanations of the performance and objectives of the funds offered.
When 401(k) plans first were conceived, the government recognized the appeal of allowing access to funds in the form of loans and hardship withdrawals as an inducement Inducement
incited brother, Orestes, to kill their mother and her lover. [Gk. Myth.: Zimmerman, 92; Gk. Lit.: Electra, Orestes]
exhorts Judah to stand fast against Assyrians. [O.T. to promote more savings. Although permitted withdrawals add a comfort level for participants, they also revisit re·vis·it
tr.v. re·vis·it·ed, re·vis·it·ing, re·vis·its
To visit again.
A second or repeated visit.
re the old issue of spinach vs. candy -- that is, what is most beneficial in the long run.
"Plans don't want to operate as savings and loan savings and loan n. a banking and lending institution, chartered either by a state or the Federal government. Savings and loans only make loans secured by real property from deposits, upon which they pay interest slightly higher than that paid by most banks. institutions," Van Domelen explains. "Therefore they restrict the availability of loans to some degree." However, almost all do offer some form of loan provision, with about a quarter of them permitting two concurrent loans to be outstanding. Generally, borrowers receive their funds within a couple of weeks from the time of their request; it rarely takes longer than a month. Nevertheless, she warns that most participants would be better advised to borrow the same sum from a bank. If they borrow from the plan, they lose their tax benefit, and end up repaying the loans with after-tax funds.
Costs and Contributions
Free lunches are hard to come by, but 401(k) plans offer some bites. Almost all employers continue to pay all the expenses incurred by the plan, with the exception of investment management fees. Expense categories include education, administration, audits and legal fees. Gradually, as plans increase in size, participants are being hit with a larger share of the bill. But don't lose sleep, says Sternklar. When the money sums are so huge, expenses can be thinly spread. Because many fees are easily tucked away, the Department of Labor insists on disclosure of all administrative costs administrative costs,
n.pl the overhead expenses incurred in the operation of a dental benefits program, excluding costs of dental services provided. . Surprise, surprise -- about half the plans disclose the full details only on specific request.
Employers should be aware of all the above features in different plans. Yet it appears that the only single element employees deeply care about is the level of employer contribution. The most common employer 401(k) match is 50 cents per dollar, according to Hewitt, but 19 percent provide a dollar per dollar match, up 5 percent since 1997. Hewitt also finds participation rates in plans with matching or discretionary employer contributions "are higher on average than plans where there is no employer contribution, and that all other key features and characteristics appear to have little influence on participation rates."
Aside from participation levels, how can an employer assess how satisfied its employees are with its 401(k)? The simple answer is to ask the HR department, which will be the first place to hear complaints. By considering all the main elements -- investment choices, servicing, information and costs -- employers should be able to select a plan that offers the benefits of balanced, long-term investing.
Vanessa Drucker is a New York-based business writer. 401(k) Plans and the Internet
Only a decade ago, 401(k) plan sponsors began using Interactive Voice Response (IVR (Interactive Voice Response) An automated telephone information system that speaks to the caller with a combination of fixed voice menus and data extracted from databases in real time. ) systems to provide account information and facilitate transactions. But IVR technology is rapidly becoming obsolete; the Internet is now the preferred method of providing participants with access to their accounts And no wonder.
* IVR systems are inflexible, generally requiring people to move through them in a specified sequence; retracing steps is difficult. It's easy to navigate in any sequence on the Internet.
* With IVR, you often must listen to menu options of no interest. On the Internet, you can go directly to the item you want.
* On the Internet, it's easy for couples or families to view information and make choices together. This isn't practical via IVR.
* On the Internet, confirmations can be printed out immediately, and corrections are easy to make. With an IVR system, printouts must be mailed or faxed.
* People have unlimited time to make elections on the Internet, but must make decisions rapidly on an IVR system.
* Far more data and plan information can be made available over the Internet than through an IVR system.
* IVR requires a dedicated, toll-free telephone number A toll-free, Freecall, Freephone, or 800 number is a special telephone number, in that the called party is charged the cost of the calls by the telephone carrier, instead of the calling party. . Your company can offer Internet access See how to access the Internet. through the same provider it uses for other business purposes.
Point and Click
Given the advantages of Internet services, including lower cost, no employer can afford to use IVR technology exclusively. So more employees can enjoy Internet efficiencies; a company can provide kiosks or other public access to computer terminals. And larger employers can offer a dedicated intranet, the database of which can be linked to other human resources The fancy word for "people." The human resources department within an organization, years ago known as the "personnel department," manages the administrative aspects of the employees. databases and to an IVR system. This set-up will accommodate the phase-out of the IVR.
Expect a 401(k) vendor to permit the following activities as part of its service:
O Automatic account look-up capability by investment fund and money type. Also historical transaction information, such as prior withdrawals, loans, investment switches, etc.
O Move assets among funds and change future investment elections.
O Change the contribution rate in the payroll deduction system.
O Print various administrative forms. Also print or order information about the plan.
O Project account balances and retirement income, factoring in assumptions about future investment returns, salary increase rates, retirement ages, etc.
O Provide information on the plan's investment funds Noun 1. investment funds - money that is invested with an expectation of profit
assets - anything of material value or usefulness that is owned by a person or company , strategies, performance ratings See benchmark. .
O Make loan applications and view the payment schedules for varying amounts. Also apply for a hardship withdrawal, although approval will require review by a plan representative.
O Link with other sites to provide more details about funds, other employer benefit plans and other information directly or indirectly related to the employee's 401(k) participation.
-- Source: USI Consulting Group US Insights newsletter.