Checking up on 401(k) Offerings

An analysis of an organization's retirement offerings should focus on the fees and offerings provided by the 401(k) plan service provider. Such a check-up should also include a review of the performance of the plan's mutual funds compared to other funds. HR leaders that initiate such an analysis could be rewarded with increased employee loyalty.

Saturday, May 1, 2010
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In these difficult times, HR departments have to cope with the after-effects of the most dismal economy most of us have ever seen. Employees are upset about their job security, upset about their retirement funds, upset about healthcare, upset that no one seems very interested in their plight and problems. Reports and surveys uniformly agree that these "upsets" have negatively affected their loyalties. 

Right now, your employees' worst financial fear is that their 401(k) retirement funds will not contain the money they will need when they retire. This has affected all parts of their lives, lessening their focus on everyday work and diminishing their loyalty and connection to their jobs.

HR leaders can help their employees cope with, manage and, hopefully, quiet those fears.

One of the first things HR executives should do is let employees know the company is taking concrete steps that will positively affect their retirement savings. This will make a real contribution to the quality of their lives and, ultimately, result in happier, more loyal employees. 

It's equally important for new Generation Y employees to know, from the start, how much attention and thought the organization has given to their ability to plan for a secure retirement. It's one more reason why they should join -- and stay with -- the company.

The next step is to have the company's 401(k) plan analyzed and evaluated by a third party. This analysis will advise plan fiduciaries whether the investment options offered in the company plan are the best available.

For instance, in every category (such as blue-chip stocks, growth stocks, mid-cap stocks) there are funds that consistently underperform and others that consistently outperform the indexes. Over the years, even a small annual difference is very important. For instance, in a 10-year time period, $100,000 invested in a fund that increases 8 percent annually grows to $215,892, while a fund that achieves a 6-percent annual increase grows to $179,084 -- a difference of $36,808. 

Checking this out is simple. Chicago-based Morningstar as well as other financial advisory organizations have all of this information easily available.

Even more important than having the right mutual funds is ensuring each portfolio's diversification. Having the right balance between bonds, blue-chip stocks, growth stocks, speculative stocks, money-market funds, etc., can make quite a difference.

For instance, from July 2008 to the bottom of the market in March 2009, a conservative investor who had 80 percent of his or her investments in bond funds and 20 percent in blue-chip stocks was down by 12 percent, compared to the -37 percent of the Dow Jones and S&P 500 indexes. Quite a difference, especially in terms of stress!

By the end of February 2010, that conservatively diversified portfolio was up by 9.8 percent from July 2008. Meanwhile, the Dow Jones/S&P 500 indexes were down 11.06 percent in that same period. Concentrated positions, such as in financial stocks, led to true disasters. 

HR must also address the appropriate portfolio diversification for each individual. It is always based on the amount of risk an employee is willing to take. 

HR can, and should, take the lead and make sure that every 401(k) participant has given his or her risk tolerance a great deal of thought and diversified his or her portfolio accordingly. Nothing could be more important.

The analysis will also determine whether the expenses both the company and its employees are paying the service provider are competitive and proper. 

The First Step

Perform an evaluation of every mutual fund that your employees can choose from, as mentioned above. Each mutual fund belongs to a specific category, such as "Large Growth Stocks" or "Large Value Stocks" or "Small Growth Stocks."

Find out how the funds offered by the company's 401(k) plan compare to others in the same category. There are hundreds in each category. Are yours in the top 25 over the last three, five or 10 years? Such information is available online.

The Second Step

Plan participants should be receiving, on a regular basis, a 401(k) investment newsletter from the service provider that has clearly stated, reader-friendly and jargon-free financial information, always emphasizing the importance of diversification.

If possible, the company should also increase the matching funds it adds to employees' 401(k) accounts. Doing that would have a major impact. It would be proof positive the company is personally interested in its employees.

Historically, in good times, companies matched the first 6 percent of each paycheck that an employee puts into their 401(k). As the recession took hold, some companies cut back or eliminated these matches; however, most did not. The closer you can come to a 6-percent match, the better.

The Third Step

Make sure all the investment alternatives/options in the company's 401(k) plan are described in clear, concise and understandable language -- and that the importance of diversification is included in that same communication.

In addition to knowing how the mutual funds offered in the 401(k) plan compare to the others in their category, it's important to know how long the present management team at the mutual fund company has been in charge. Seek out one that has gone through good and bad markets. An ideal tenure is at least five to 10 years.

Have the service provider itemize the various expenses being paid by the company and its employees. This would include the upfront charges, back-end charges, administrative and any other fees. The person or company evaluating the 401(k) plan can then compare the expenses to other company plans. 

HR leaders should also ask some employees if they're satisfied with the responses they get from the service provider. The comments may offer some surprises. Employees should also be asked their opinions of the financial information, if any, they're getting. Are they satisfied with the account statements they get from the service provider? They should receive these every month. 

How easy or difficult is it to make changes in their investments? During what hours can participants call customer service and when they do, are they able to reach a person or do they have to use a voice-response system?

If participants do have access to someone, that person should be a registered representative and be knowledgeable, at the very least, about all of the mutual funds in your plan. 

Every six months HR leaders should schedule a complete review of the mutual funds being offered to employees. See how each one is doing versus its category. If a particular fund is doing poorly, it should be investigated. Have any of the services been changed? Have any expenses charged to participants or the company changed?

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Information Your Employees Must Have

Every 401(k) participant must decide how much risk he or she is willing to take with 401(k) money. Once each employee has made that determination, he or she can easily identify himself or herself as an investor who is either very conservative, generally conservative, willing to take moderate risk or speculative.

As speculation is really not appropriate for 401(k) accounts, each of the first three categories should be fully described -- as follows -- so participants can see if the description matches who they are and how they think:

Very Conservative describes someone who is close to retirement and believes they have enough money to retire comfortably or is sure they have more than enough money to retire and just do not want see any of it disappear or would be too upset if they lost any money. They are risk averse. This investor should have the following mutual fund investments: 80 percent to 100 percent in high-quality bonds with an average maturity of 10 to 12 years and up to 20 percent blue chip stocks.

Generally Conservative describes someone over 40 who believes they will have enough money to retire in about 20 years. They do not want much risk but would like their investments to grow in line with, or somewhat faster than, inflation. They are not of a speculative nature. Slow, steady and sure are important words for them. This investor should have the following mutual fund investments: 50 percent in high-quality bonds with an average maturity of 15 to 20 years; 20 percent in blue-chip stocks, 20 percent in large growth-oriented companies and 10 percent in smaller-growing companies 

Willing To Take Moderate Risks describes someone with a conservative streak but firmly believes stocks will do better than bonds over the long term. They want their investments to do somewhat better than the various benchmarks such as the Dow Jones and the Standard & Poor 500. They realize there is a risk that, in a market decline, their portfolio will go down with the overall market. This investor should have the following mutual fund investments: 15-percent high-quality bonds; 10-percent high-yield bonds, 25-percent blue-chip stocks, 40-percent large-cap growth stocks, 10-percent smaller-growing companies.

Our analysis of 401(k) plans has shown that plans with more than 2,000 participants generally include better mutual funds and charge lower fees than those with less than 2,000 participants. The only reason for this may be that service providers make more money from plans with more participants

It's best to have your plan analyzed by an experienced finance professional. Your cost for the analysis and evaluation of your company's 401(k) should be reasonable -- somewhere between $1,500 and $2,500. That's because most of the information needed is neither technical nor mysterious, and the analysis does not get into the structure or legalese of the plan.

Professional investment advisers, not stockbrokers, are equipped to do this kind of analysis. You should not bring in someone who might benefit from any changes you may make.

Saul Nirenberg has been in the financial world for the last 40 years. He has been a partner at a major brokerage house and currently serves as an arbitrator and mediator for the New York Stock Exchange. He also serves as an expert witness in securities fraud and misrepresentation cases. He has no affiliations with any financial institutions, advisers or stock brokers.  His Web site is, and a free evaluation of how various mutual funds perform, compared to other funds, can be obtained by e-mailing

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