By Liam Pleven
It's tough to tell whether your 401(k) plan is delivering all it
should for retirement. It is even harder to persuade your employer
to make changes if you find room for improvement.
Common flaws in the popular savings plans include high fees and
the absence of low-cost index funds, which can make investing
cheaper and easier. Conflicts of interest, fraud or theft, though
far less common, also can cost 401(k) participants dearly.
Yet pushing for change can put workers in the uncomfortable
position of confronting their employer. Few people want to question
the judgment of people who sign their paycheck and control
promotions and raises.
That means employees who see ways to bolster their 401(k) need
to determine whether the requests are reasonable, and then make the
case tactfully.
Jessica Robinson, a 37-year-old dental hygienist, and her
husband, Brian, pointed out to her boss, Brad Dodds, how fees were
affecting everyone who participates in the 401(k) plan at her small
dental office.
The fees "kind of put up a red flag," says Ms. Robinson, who
lives in Eden Prairie, Minn.
Mr. Dodds hadn't paid much attention to fees. "I just looked at
my statements and put them in the drawer," he says. He and the
Robinsons approached Wells Fargo Advisors, a unit of Wells Fargo,
which recently agreed to reduce the plan's annual administrative
fee to 0.75% of assets, down from 1.5%. For a participant with an
account worth $100,000, the change would save $750 a year.
About 53 million people save for retirement in 401(k) plans,
nearly double the number two decades ago, according to the latest
estimate from the Investment Company Institute and the Employee
Benefit Research Institute.
At the end of September, investors had nearly $4.5 trillion in
401(k) accounts and almost $2.2 trillion in similar
defined-contribution plans, the institute estimates. By comparison,
there is more than $8 trillion in traditional defined-benefit
plans, which offer a predictable payout.
Here's how to advocate for a better 401(k) plan.
Pick Your Battles
First, figure out whether the changes you seek are
worthwhile.
High fees should be a major concern, as the consequences in
terms of lower retirement savings can be significant.
You may have a decent chance of success in arguing for lower
fees. "That's something that an individual employee could
reasonably ask for," says Burton Malkiel, an economics professor at
Princeton University and author of a paper on retirement plans to
be published this summer in the Journal of Investment
Management.
Index funds, which are designed to track investment benchmarks
such as the S&P 500, also are worth lobbying for. Many experts
consider them the best option for investors because the funds tend
to charge lower fees than those run by active stock pickers. Index
funds also don't leave investors at risk of lagging behind the
market, which active funds often do.
But some plans still don't offer index funds, particularly
smaller plans. More than 97% of 401(k) plans that had more than $1
billion in assets offered at least one index fund, according to a
December report from BrightScope, a San Diego-based firm that rates
401(k) plans, and the Investment Company Institute.
By contrast, 79% of plans with $1 million to $10 million in
assets offered an index fund, and about two-thirds of plans with
less than $1 million in assets did. The report was based on audited
filings with the U.S. Department of Labor for 2012.
Similarly, many plans don't offer target-date funds, according
to the report. Such funds typically adjust their mix of investments
to become more conservative as an investor nears retirement, and
they can be useful for investors who don't monitor their accounts
closely.
On the other hand, some requests may be long shots. it could be
tough to get your employer to make larger contributions to employee
401(k) accounts or to offer more a generous match for employee
contributions, because the added cost could be substantial.
One rule of thumb: The changes you seek should benefit
participants generally--and not promote unnecessary risk-taking.
"The XYZ Hot Tip Stock Fund may not fit the criteria to go on the
[investment] menu," says Nevin Adams, a spokesman for the National
Association of Plan Advisors, which represents financial firms that
work with 401(k) plans.
Do Your Homework
Even in some relatively large companies, the people in charge of
making decisions about the 401(k) plan may not know much about
investing. Doing some research on your own is essential.
For example, if you want to push for lower fees, start by
reviewing your account statement and the disclosures that plans are
required to provide participants. Fees come in various forms,
including administrative costs charged to the plan--which can be
borne by participants--and expense ratios on individual funds that
participants invest in.
It isn't always easy to determine whether your fees are high or
low, because that can depend on various factors, including how big
the plan is and how much of the cost your employer is willing to
bear.
"A lot of times, companies themselves don't know they're
overpaying," says Mike Alfred, BrightScope's chief executive.
But you can try to narrow it down. For example, compare the
expense ratios on the funds in your plan to similar funds. Many
broad stock-market index funds charge annual fees of less than
0.20%, or $20 on a $10,000 investment, so if you are paying
substantially more, that could be a sign of a high-fee plan.
The average expense ratio on an actively managed mutual fund,
adjusted for assets, is 0.85%, according to investment-research
firm Morningstar.
If you work for a larger company, you also can search for your
plan on BrightScope's website, where it ranks 401(k) plans and
compares them to plans offered by rival firms based on fees,
company generosity and other criteria.
Details also are available on Form 5500, which employers file
with the Labor Department and which you can search for on the
agency's website or request from your employer.
Once you know the details about your own plan, it can be worth
checking with relatives or friends, too. Brian Robinson, Jessica's
husband, felt that the 1.5% administrative fee in her 401(k) plan
was relatively high based on his experience working for larger
companies, which often cover those expenses.
"You don't even see the fees," he says.
A report issued last year by Deloitte and the Investment Company
Institute also could provide some guidance. The report, which
looked at the combined impact of different 401(k) fees, found that
the typical participant is in a plan with annual fees of 0.67% of
assets. For plans with $1 million to less than $10 million, that
figure is 1.27%, and for plans with at least $500 million, it is
0.37%. Participants bear 87% of those costs on average, according
to the report.
Similarly, if you want to bolster your case for adding an index
fund, you can point to endorsements by Warren Buffett and others.
For target-date funds, you can note that the Labor Department
allows employers to invest participants' 401(k) contributions in
the funds by default, a measure of their wide acceptance.
Be Diplomatic
Once you research the issues, you may know more about how your
plan measures up than the people you will be lobbying.
Still, be professional and diplomatic when raising a question
that could come across as criticism of your employer's
decisions.
"There's a certain amount of risk," says Norman Stein, an expert
in benefits law at Drexel University. "It might seem like a
complaint."
Figure out who at your company to approach. That might be your
boss or someone else designated to take fiduciary responsibility
for the plan. In larger companies, it might be easiest to approach
the human-resources department.
Consider writing a letter. "You've got to frame the request.
Keep it positive. Put it in writing. Be prepared to assist," says
Greg Carpenter, chief executive of Employee Fiduciary, which is
based in Mobile, Ala., and offers record-keeping services to 401(k)
plans.
One template for such a letter about adding index funds is
available at Bogleheads.org, a website for followers of Vanguard
Group founder and index-fund champion John Bogle, in a section on
campaigning for a better 401(k).
Note that the Bogleheads template invokes the Employee
Retirement Income Security Act, or Erisa, which covers an
employer's legal obligations in operating a 401(k) plan. Citing the
law could help ensure your request is taken seriously, but it also
could raise the stakes.
Another option is to suggest alternative service providers, if
you think the financial firms your employer works with charge too
much.
Check if your colleagues are concerned about the same issue,
which could bolster your case. Also, think about your position in
the company. The reaction may depend in part on whether you are
seen as model employee or a troublemaker, Mr. Stein says.
And consider the workplace culture. Jay Greenberg, an executive
at the National Council on Aging, which is based in Arlington, Va.,
says he spoke up in a meeting about the nonprofit's 401(k)-style
plan several months ago. "I asked, 'Why don't we have index
funds?'"
Index funds were soon added to the plan's investment options.
Mr. Greenberg says he didn't fear retaliation because the council
cultivates open dialogue. He also is a former entrepreneur who is
financially independent, and he believes his reputation for
financial savvy helped his comment get taken seriously.
Consider Your Options
If your campaign falls short, that doesn't necessarily mean you
should stop contributing to your 401(k). But you may need to
consider your individual circumstances and do some calculations to
determine the best course of action.
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For example, it generally is worthwhile to contribute enough to
qualify for any match your employer offers. But if the fees in your
plan are high and the match isn't generous, it might make sense to
take some money you would have contributed and instead invest it in
a low-cost index fund in an individual retirement account, says
Princeton's Mr. Malkiel.
On the other hand, Mr. Malkiel says, "a generous match will make
up for high fees."
Still, keep on pressing for lower fees, he adds, in case there
is a change at your company that makes management more receptive to
the notion.
Keep in mind that some problems go well beyond fees or
investment choices, and may be worth the attention of
regulators.
Investors who think their employer is involved in a "sweetheart
deal" related to the 401(k) plan should consider calling the Labor
Department, says Timothy Hauser, a deputy assistant secretary at
the department's Employee Benefits Security Administration.
"Nobody comes before the plan or its participants," he says. "We
depend on plan participants and private actors to look out for this
system."
Similarly, if you suspect that your employer isn't putting your
401(k) contributions into your account as required, that is a
reason to call the Department of Labor, says Drexel's Mr.
Stein.
Participants in 401(k) plans can call the Employee Benefits
Security Administration at 866-444-3272, or use the
consumer-assistance page on its website.
The law protects people from retaliation, and the department can
file a lawsuit to enforce that protection, Mr. Hauser says. Still,
be aware of the risk. "There are some bad people out there," he
says.
Jerome Schlichter, a St. Louis lawyer who has filed a number of
cases regarding 401(k) plans, says fees have come down as a result
of increasing attention.
But, he says, "there's work to be done."
Email: liam.pleven@wsj.com
Write to Liam Pleven at liam.pleven@wsj.com
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