5 Questions to Ask About Your 401k

!: 5 Questions to Ask About Your 401k

If you are counting on your 401k plan for retirement - beware! The current financial crisis and stock market collapse are troubling enough, but what many retirement savers don't know is that their 401k plans may not be up to the task.

401k's have become the predominant retirement funding tool in the U.S. Twenty-five years ago. traditional defined benefit pensions were the primary type of retirement plan covering more than 60% of the workforce that had pension plan coverage. Today, defined contribution plans (mostly 401k) are the primary retirement plan for 63% of the covered workforce. Only about 17% of the covered workforce remains in traditional pension programs.

For the worker, this has meant a seismic shift in responsibility: where once the employer was responsible for seeing that workers contributed to the pension and that pension investments performed well enough to provide promised benefits, in the DC world, 401k planning responsibilities fall on squarely the worker. The best 401k plan sponsors provide generous matches, strong retirement/investment education support and other plan features to help out. Workers who take full advantage of these plans stand a good chance of accumulating adequate retirement savings.

But for many others, their 401k is a minimal retirement plan that offers only a weak chance of providing a decent stream of income to workers when they retire.

How do you know how your 401k plan compares? Here are five benchmark questions to guide you.

Does Your 401k Have an Employer Match? Employers are not required to match employee contributions. But the best 401k plans do match. Employer matching features are key to assessing the quality of a 401k plan. It is much more difficult for workers to accumulate adequate retirement savings with a 401k plan that lacks an employer match. For example, a 30 year-old earning ,000, contributing 8% (with a 50% employer match-up to 6%) and earning an 8% annual return will have 38% more in retirement savings at age 65 than the same employee with no employer match. What is the level of your 401k plan's employer match? The most common matching level, according to Hewitt Associates, is Body.50 employer for each .00 employee contribution, up to a maximum of 6% of pay. Think of the employer match as an immediate, risk-free return on your investment (ROI). Regardless of the level of your plan's match, you should always contribute enough to get the maximum possible match. The higher the maximum employer matching contribution, the greater the opportunity you have to leverage contributions and build a retirement nest egg. According to the Profit Sharing/401k Council of America, the average employer match is 3%. Less than 5% of plans match more than 6% of compensation. Does your 401k investment menu include low-cost, broad-market index funds for stocks, bonds and international investments options from one or more large and reputable mutual fund firms (e.g. Vanguard, Fidelity, Charles Schwab, T. Rowe Price, etc.). Prudent investing in index funds is almost always the most cost-effective long-term strategy for 401k participants. Large, well-run index funds from reputable mutual fund firms have very low expenses so that the money you and your employer contribute goes to work for your retirement instead of going to pay fees and costs associated with so-called "actively managed" funds. Mounds of academic research show that over the long-run, index funds outperform actively managed funds. If your 401k plan doesn't offer quality index fund options, it is a serious shortcoming. Do any of the investment options under your plan include sales charges (such as front or backend loads, deferred sales charges or redemption fees)? There are plenty of excellent no-load funds available in every category of investments. If you plan includes investment funds with sales charges or loads, you're likely paying that are higher than they should be. Check if your plan automatically enrolls new employees in the 401k plan (unless they specifically opt not to enroll)? Automatic enrollment is a relatively new 401k feature intended to increase 401k participation particularly among younger workers and other groups who may not recognize the importance of retirement savings. Research shows that for participants with incomes under ,000, 401k participation increases from 44% to 86% with automatic enrollment. For participants age 25-34, participation increases from 56% to 86%. Presence of an automatic enrollment feature is a good indicator that your employer is serious about helping workers save for retirement.

There are, of course, many other questions and issues that can be raised with regard to the overall quality of a 401k plan. These five questions are a basic guide. For a more thorough assessment, you can use this 401k plan assessment tool. Don't be afraid to ask your company's human resource department for help in getting answers. It is your future retirement at stake and letting the company know the quality of the 401k plan is a priority is a message worth sending.

5 Questions to Ask About Your 401k

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Business Survival in Today's Economy - From Processes to People to ROI

I was sitting in the office of the owner of a furniture company in Kansas City.  It was a medium-sized company - about 80 employees - and she had been telling me that their last round of layoffs was putting a lot of pressure on certain teams that had the same workload but less people to get it done.  I asked how she was dealing with that issue.

"Well," she said, "The vendors who sold us our credit application software just released a new version.  They gave us a demo last week, and we're going to upgrade.  It seems a little easier to use, and it has a couple of new reporting features that'll save us some time."

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I nodded and asked, "How much does something like that run?"

Business Survival in Today's Economy - From Processes to People to ROI

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"It's about 0 dollars a license, and we have about 30 analysts who use it."

"That's actually not too bad," I replied.  "I was expecting it to be several hundred dollars more.  If it does what you wanted and will save you enough time to justify the cost, you got a good deal."

"Well, that's per month," she said.

I paused for a minute.  I actually wanted to whistle, but I try not to react badly in front of business owners.

"So, that's 00 a month for this new software," I said, carefully.

"Yes," she said.  "I know it sounds like a lot, but I think the new features are going to be worth it.  It's not too much more than what we're paying now."

"Well, sure, you always have to run the numbers and make sure that sort of thing will save you enough time to earn you some money.  Let me ask you, though.  These analysts who have all this extra work you were telling me about, what sort of productivity improvement training are you sending them to?" I asked.

"Oh, well, we're not going to do something like that," she answered.  She even chuckled a little.

"If you don't mind me asking," I ventured, "why aren't you making that part of your plan?"

"We just can't afford to budget for training this year."

I just sat quietly for a moment.  She and I had worked together, before, and I knew I didn't need to say anything.  I didn't wait long.

"I know what you're going to say," she said.

"What am I going to say?"

"You're going to say that I'm spending five thousand dollars a month on software and no money at all on the people who'll be using the software, even though I'm asking them to do more work with less people."

"That does sound like something I'd say."  I started to smile a little bit.

"And this is where you'll take your notebook out and show me that I'll get more productivity per dollar if I invest in the people before I invest in their systems."

"That also sounds like me," I said.  "Do you really need me for the rest of this meeting?  You're doing fine all by yourself."

She chuckled and asked what the next step was.

"Well, let me ask you some more questions about this situation, and we'll get all the facts down, and we'll see if what you helped me say so well turns out to be right or not."

It never ceases to amaze me how much money companies will spend on equipment, software, buildings, services, and all sorts of things to raise revenues, lower expenses, and increase productivity.  Yet, they won't spend a single dollar on the people who are allegedly using all these things and driving all this productivity.

A CFO once told me that his company didn't think of people just as "company equipment." That's good, but the sad reality is that, for many companies, thinking of their people as equipment would actually be quite a step up!

If you get nothing else out of my little story, take this away: your biggest gains in profitability come from upgrading your people.  Other kinds of improvements are nickel and dime ROI compared to the results you'll get by increasing a person's performance, or a team's performance, or a manager's ability to get more out of her team.

If you want your business to survive, and even thrive, in an economy like this one, you have to intelligently plan your strategies and allocate your resources around what will give you the most return, and that is easily your employee base.  Improve that, and the effect on your bottom line will be amazing.

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