Is Your 401(K) Plan

What’s up with 401(k) Plans? Is yours the best it can be? Or can you make it better?

If you offer your employees a 401(k) retirement savings plan—or if you'd like to—you may be able to get more bang for your buck. Some new investment options and variations on the standard 401(k) program can lift a 401(k)'s allure as an employee benefit at little or no cost:  Deemed IRAs. A change in tax law in 2001 allows 401(k) participants to set up individual retirement accounts managed by their 401(k) provider and funded through payroll deductions. Offering this option to your employees affords savers the chance to shelter more income from taxes in an easy one-stop-shopping mechanism—without the hassle of setting up and keeping track of a separate IRA account and accumulating the funds to deposit before tax time. For employers, the cost is minimal, since management of the IRAs is a small add-on job for whoever is managing the 401(k) program already.  Managed accounts. In the wake of the Enron 401(k) debacle and three years of a losing stock market, more employees are asking for help in picking investments, prompting renewed interest in managed accounts. Also called lifestyle accounts, these options fell out of favor in the late 1990s, when it seemed there were no bad stock picks and many 401(k) investors preferred to handle their own investment choices.  Real estate investing. More 401(k)s will broaden the investment options offered, reaching beyond traditional equities markets and into real estate. Large plans are likely to be drawn to real estate investment trusts, or REITs. Plan providers will balk at the administrative complexities of direct real estate investing. But some sole proprietors with I-401(k)s may opt to put some retirement funds directly into real estate, particularly if they are Realtors, settlement attorneys or work in other fields with close connections to the industry and they are willing to manage their own accounts.

Overall participation rates in 401(k) plans are headed down. After climbing steadily through the early 1990’s, from about 72% in 1991 to nearly 86% in 1995, the share of eligible employees who actually contributed to 401(k) plans dropped to about 78% in 2001, according to the Profit Sharing/401(k) Council of America. Participation rates probably dipped further in 2002, though final figures aren't available yet. They will begin to climb again in mid to late 2003, once the economic recovery begins to be felt and workers become more willing to sock away extra cash for retirement. But the increase isn't likely to show up in the numbers until 2004.

Note that the cost of offering 401(k) programs to employees is likely to rise in coming months. Stung by eroding profit margins in a climate of declining stock prices, many plan providers will head for the exits, leaving some midsize and small employers without a plan provider. Moreover, providers that remain in the market are for the most part electing to protect their profit margins by trimming costs rather than increasing the fees they charge. But odds are that traditional fee structures—based on asset values of the employer's plan—will soon be abandoned in favor of fees that depend more on the number of participants or participants' activity levels than on how much the total plan is worth.

Joan Pryde Reprinted with permission from The Kiplinger Letters, January 8, 2003.