10 Things 401k Companies Will Not Tell You

Article published by Bt Elizatbeh O'Brien, MarketWatch

401k plans were never designed to supplant pensions, merely to provide supplementary income to retirees.
But over the past three decades, employers have continued to eliminate defined-benefits programs (pensions) in favor of less-costly contributions into workers' 401k's.

We weren't meant to carry the weight of your future
When 401k's were first introduced, in the late 1970s, most workers still had "defined-benefit" pensions -- retirement plans in which employers made all the decisions about what to invest where. Back then, 401k's were intended as mere supplements to those plans, says Lee Topley, the managing director of the retirement plan consulting group at Unified Trust, a Lexington, Ky., company that manages the needs of plan participants on behalf of employers.

We have no idea how much cash you'll need in retirement . . .
When it comes to actually figuring out how much to save for a comfortable retirement, most workers are on their own. And once they stop working, it's up to them to figure out how to turn their nest egg into an income stream.

Figuring out how much you'll need isn't high on our agenda
Nearly three-quarters of large employers surveyed this year by Towers Watson say they offer a 401k plan to help provide for workers' retirement income. But when companies were asked to name the top factors driving plan design, workers' ability to retire came in fifth, behind the competitiveness of benefits within the industry, benefit plan costs, employee attraction and retention, and legislation and compliance.

Fee transparency? What fee transparency?
Some statements "disclosed" a wide range of fees, as in "your expenses range from 0.25% to 2%," leaving companies wondering where exactly their fees stood. What's more, the fees came without any guidance on industry averages. So even if a company was told it paid, say, 1.25%, executives would have no idea how those fees stacked up against other plans.

You're losing years' worth of savings to fees
Take, for example, a portfolio that says its fee is 1%, a percentage that wouldn't be uncommon. That may not sound like a whole lot. But when it's chipped from your retirement nest egg annually, the cumulative effect can be significant. Over the course of a career, a worker who makes $75,000 a year and saves 8% of that annually in a 401k would lose 2.8 years' worth of savings in a target-date fund with a 0.2% fee, according to an analysis by Towers Watson. That amount of lost savings jumps to 11.6 years' worth in a fund with a 1% fee.

Fewer choices doesn't mean better ones
The number of large employers that offer 20 or more funds declined by 8% from 2010 to 2012, and the number of sponsors that offer nine options or fewer increased by 3%, according to Towers Watson. But the choices that remain are still too expensive overall, consumer advocates say.

The system isn't working for employees -- or employers
The aggregate retirement-income deficit for all baby boomers and Gen Xers -- that is, the amount by which their savings, plus Social Security, falls short of what they'll need -- is $4.3 trillion, according to the Employee Benefit Research Institute. Clearly, folks aren't setting aside enough for their post-work lives.

Small-business employees are missing out
Just half of workers in companies with fewer than 100 employees have access to retirement accounts, according to the federal Bureau of Labor Statistics, compared with 79% of workers in companies with up to 499 workers, and 86% of workers in large companies.

Automatic enrollment won't save you
While it's good that employees are forced to save -- few who are auto-enrolled bother to opt out -- they're not saving as much as they should. That's because companies often deliberately set the default contribution rate low -- generally around 3% of pay -- so they don't have to match as much, Credico says. Of course, employees can always change their default rate, but few bother to do so. Indeed, many workers don't even know their contribution rate.


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