401(k) investors get new responsibility

November 01, 1992|By Knight-Ridder News Service

A significant shift in thinking about pension planning bega about 10 years ago, when 401(k) plans were introduced.

The shift was toward what are called "defined contribution plans" and away from "defined benefit plans," the traditional pension, in which your employer set aside money for your old age and was responsible for investing it wisely. With the contribution plan, usually a 401(k), you are the caretaker.

The 401(k) plans are rapidly becoming the dominant retirement plan for Americans. The Labor Department, which regulates pensions, estimates that there are 100,000 "self-directed" pension plans, holding $335 billion in assets. Buck Consultants, an employee benefits firm, reported in a recent study that 93 percent of companies offer a 401(k), compared with 36 percent in 1984. Nearly 75 percent of the employees of companies that offer them participate.

A 401(k) allows you to put part of your income into an investment program and defer the taxes until you retire or withdraw the money. (The maximum contribution you can make in 1992 is $8,728 of pre-tax dollars). A big attraction of 401(k)s is that your employer usually matches your contribution, typically 25 cents or 50 cents for every dollar you pay in. The money in the plan is invested in a variety of investments, such as money market, stock or bond funds. As with an Individual Retirement Account, your earnings grow tax-free.

The problem is that most of us aren't very savvy about financial matters. The choices are overwhelming, and most of us don't have the expertise, or even access to the information, that we need to make informed decisions. It is possible that some of us may approach retirement without any pension nest egg because we did not invest, or at least not wisely.

The Labor Department recently issued new rules governing 401 (k) plans, and you may be affected by what they say.

In brief, the rules say that a plan sponsor must offer three core funds in which you may invest, and the three must be different enough in objectives and risks to allow you a wide range of choices. In addition, you must be allowed to move your money every quarter, and the company must provide you with quarterly performance reports.

If plan sponsors meet these guidelines, they limit their responsibility for the investment decisions of employees, who exercise control over their retirement assets by deciding where to put their money.

"The responsibility has shifted to the participant," said Kathy Ireland, associate counsel for pensions for the Investment Company Institute, the trade organization of the mutual fund industry. In other words, if you make a bad investment decision, it's not the company's fault if you gut your retirement account.

"The plan sponsor isn't exactly off the hook," Ms. Ireland said. The sponsor will be held to established prudence standards for selecting appropriate funds and monitoring the performance of fund managers. "The options offered to participants must be appropriate, with sufficient information and different investment options," she said.

It puts the burden of education on the plan's sponsor, said Randi Lewis, a benefit consultant with Buck Consultants in Denver. "Just passing out a prospectus won't be enough, they will have to go further," she said.

That, in turn, puts a burden on you if you participate in a 401(k) where you work. "Most of us aren't financial experts, and being responsible for out future financial security is scary," Ms. Lewis said.

She offers this advice:

* Take advantage of all of the information provided.

* Read the materials.

* Attend any company-sponsored seminars or programs.

* Study the quarterly accounting statements carefully.

* Track the performance of your funds in the daily financial pages of your newspaper.

* Don't be too conservative with all of your money. The younger you are, the more risk you can afford to take.

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