2008 will simply not go away. It’s unfortunate really and although I have suggested over the years that our long-term memory could stand an upgrade, the reasons for what occured in the financial markets is unlikely to happen for another five years (although the potential fallout in 2012 in the bond markets is definitely troublesome). So why should your employer worry now, after the fact and after you have lost a great deal of what you had investing in your retirement future?
Hewitt Associates, the human resource professionals, annually surveys employers about the future decisions they will make concerning their 401(k) plans. Because the field of human resources is simply code for risk management, revamping your 401(k) plan might be seen as a way to help you. In truth, it is the other way around. And judging from the respondents of the survey, that help will be centered on fewer and less risky options, more weight put on the employee to understand what is happening to their plan and getting more people involved in the plan through auto-enrollment.
Blame Game
Believe it or not, many employees saw the declining balances in their 401(k) as part their fault and part the fault of the employer. Perhaps we still believed the employer cared enough about how and where we invested our money, had some grasp of their fiduciary responsibility or because they were offering the plan at all, understood the underlying offerings, fees, and overall structure. Many were matching contributions and we all made assumptions that because of that, it must be good. What business would throw its own money away?
They seem to be asking that question more these days as they look at where their plans are headed. Many believe that the new face of the 401(k) will have more employee focused responsibility. If you knew not how to invest before this, you need not worry. The employer will try to educate you. But failing that, you will fund increased auto-enrollment for new hires, better auto-balancing features that will take some of the control out of your hands to provide less risk, and plans that are more streamlined. This is a move in the wrong direction but it could be worse.
Sign Us Up
Auto-enrollment in concept is a good idea. How it implimented is up to the company that hired you. Many businesses plan on creating a more competitive 401(k) plan in the hope of luring better talent, a potential sign of optimism in a recovery economy. But often auto-enrollment means target date funds.
This is sort of like a pension plan with better PR and less of a track record. The company basically picks the fund for you, based on your age of retirement and begins investing for you. Okay, they use your money and many do offer a match, but the concept is still in its infancy. Some businesses are using this auto-enrollment feature to channel raises into future retirement plans rather than into your pocket first.
One of the biggest downside to auto-enrollment is the cost. The employer will have more folks in the plan and because of the increased participation, more matches to contend with. This will come at the expense of other benefits. Lower employer health care benefits are one way to cut those costs. Streamlining the overall plan to include fewer choices at a lower cost is another.
The Balanced Approach
Auto-rebalancing seems like a good idea. Enough retirement professionals still suggest a regular review of your investment portfolio to adjust for too much growth in one area, funds that have grown or lost too much over the previous quarter or year or even too much or too little risk. Will having your plan administrator do this for you be for your benefit? Or theirs?
Some have likened the action to the same sort of concern that brought safety belts to automobiles. Initially, you pick the funds that best suit your needs. This assumes you have a firm grasp on what those needs are. Most simply require that they have enough money to retire on and that they never run out of it as long as they live. This is sort of a pining for the old days of a pension. And these employers can assure you that those days are not returning any time soon. (Pensions do still exist with many employers – about 74% – still have a plan even if it is frozen but the vast majority have shifted focus to the defined contribution plan structure.)
Employers now feel as though auto-rebalancing is key to offsetting their employee’s poor investment decisions. In light of how much these folks lost in 2008/2009, this seems like an idea whose time has arrived. Unfortunately, over half of the plans already had just such a feature. There is little mention in the survey about how this feature could be improved or whether it works at all.
Boiled Down to Contributions
At the heart of any solid plan is the contribution. Too little and you will not have enough to retire. To that end, contribution escalation seems like a good idea. Employees can opt out if they choose. And perhaps this is also a telling sign of the recovery economy: employers don’t see this as a benefit worth offering in the near future as they revamp their plans.
The good news is that many employers do not plan to offer annuities as part of their plan offerings. The bad news is many employers are not planning to offer more education, increased matches (although many claim to be reinstating matching contributions in 2010) or work at suggesting the employer’s stock as not the best option for employees. This last piece of bad news suggests that any effort at changing how you direct your contribution is half-hearted at best. Far too many employees believe that investing in the business is still a good idea and employers are not about to discourage this practice any time soon.
While 80% of the employers will attempt to do a better job at communicating the downfalls of borrowing against the plan or cashing the plan out, only 43% plan on reviewing how well their plan serves the needs of all employees. If anything, they are looking at thier costs and the fees charged for administration of the plan. This means fewer chocies in the future and less risky investments. This conservative approach may defeat any effort at increasing the chances that the participant will reach their goals.
Many firms believe their plans offer good communication about risk and fees.
The future of your 401(k) plan still relies on your continued contributions, increasing them over time and using risk in the earliest years to grow account balances. If the future of the 401(k) as seen by this sort of survey are any indication, you will be required to do more monitoring (of how the company and plan adminstrators conduct their business) than less. It still remains your plan and ultimately, your responsibility.
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