Thursday, June 25, 1998

Have you done your 401(k) checkup yet?

By VIVIAN MARINO / AP Business Writer

NEW YORK (AP) -- Gone are the days of gold watches and fat pensions. More employers are shifting responsibility for retirement to employees, and they're using 401(k) plans to fill the gap.

OK, some still hand out flashy time pieces and offer a fixed income at retirement, a k a the defined-benefit plan. But that's phasing out.

The 401(k) plan -- a defined-contribution plan where workers place a percentage of gross income in a tax-deferred account and employers often match the contribution -- is the fastest growing employee benefit. More than 24 million workers participate in them; plan assets top $2 trillion.

With so much at stake, you'd expect most people to have a good handle on their accounts, right? Not quite.

Financial advisers say the investment choices many plan participants make are often inadequate to meet retirement needs. Worse yet, as many as 20 percent of those eligible to participate don't, surveys show.

Advisers recommend an annual 401(k) checkup, preferably at the start of the year, to ensure you're on the right path toward a comfortable retirement nest egg. If you haven't done one yet, try it now at the year's halfway point. If you're starting a new job, all the better to work from a clean slate.

A few things to do:

-- Join up (if you haven't already). Most employers offer some type of defined-contribution plan. A good plan "is a great way to attract and retain good employees," says Peter J. Smail, president of Fidelity Institutional Retirement Services Co. But he adds, "the single biggest obstacle is getting people to take that first step and join. They may say they don't think they can afford it, but they can't afford not to."

Enrollment eligibility is typically after a year of employment. But more companies are reducing or eliminating the waiting period, says the 401(k) Association in Cross Fork, Pa. It noted the trend in its spring newsletter: "Many newly hired employees are coming from companies where they had been contributing ... and they do not want to wait a year or more."

-- Review goals. Do you plan to retire at the typical age? Are there other retirement funds available? Has anything changed since you last reviewed your plan?

"Benchmarks are needed to show progress," says Edmund Martinez, director of investment at Merrill Lynch's employee services group.

A financial professional can help determine how much you'll need to contribute each year. Most financial companies have fill-in-the-blank calculations. There are also good retirement software and books available.

Software maker Quicken has an online service (www.quicken.com) that performs these calculations in seconds. For instance, it concluded that a 30-year-old man with $50,000 annual income needs $792,216 in today's dollars by the time he's 65 to obtain a gross retirement income of $40,000, or 80 percent of current earnings, for 20 years of retirement. (Social Security benefits also were taken into account.)

-- Maximize the match. Eighty-eight percent of all employers with 401(k) plans match employees' contributions, a survey by Buck Consultants Inc. found. The most common match: 50 cents on the dollar, up to a maximum 6 percent of salary.

To get the maximum benefit you'll also need to contribute 6 percent. The most employees can set aside annually, though, is $10,000. Those who can't afford much, should still set something aside, even if it's as little as 1 percent of salary, then raise the amount as salary increases.

-- Allocate assets. Most 401(k) plans have expanded the number of available investment choices. The average is eight. Many big companies offer dozens of mutual fund options, and a few have self-directed brokerage accounts, giving unlimited access to stocks, bonds and funds.

Some participants, however, tend to allocate too much money in one type of investment rather than diversify. "Women tend to invest their pension funds in safer and lower-yield assets than men," which hurts them in the long run, a 1996 General Accounting Office report found.

Those seeking the biggest gains over the longest periods should emphasize stocks since they historically produce the highest earnings, with some risk over short periods; those willing to accept more modest gains in return for less risk should emphasize bonds; those with no risk tolerance should consider money-market funds or other cash equivalents.

Financial advisers recommend "rebalancing" a portfolio annually -- shifting money from the investments that did well into the ones that didn't. That puts the same percentages of money in each fund, giving each an equal chance to excel.

-- Get educated. Plan administrators say inadequate employee education is largely to blame for a poorly performing 401(k). But that's becoming less often the case.

"In the last five years, one of the single biggest issues associated with 401(k) plans has been the emphasis placed on employee education," Smail says. More employers provide regular seminars and printed material to teach workers about investing; some bring in plan administrators for one-on-one advice.

A recent Merrill Lynch study found that when employers explain how 401(k)s work and how they benefit employees, balances are bigger and savings rates are higher.

-- Get plan friendly. Most plans allow you to dial a toll-free number or access an Internet Web page to check account balances, make trades, or change your contribution or its mix. (You also should keep track of quarterly or monthly statements.)

The majority of large companies allow borrowing from your 401(k), though advisers caution that should be done only in emergencies since you'd be robbing yourself of compounded interest.