401(k)

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 It is my opinion from reviewing the investment knowledge base of corporate employees in context with mandatory corporate education under section 404(c), that little true education is being provided. Read below so you can understand your rights.

404(c): Many companies are offering 401(K) plans to employees as either substitutes for corporate defined benefit plans or just as stand alone retirement vehicles. Companies normally offer at least four investment options, though I have seen as many as fifty. But from here we have a radical departure from past company directed plans in that, instead of the onus of selecting the investments falling on corporate trustees- and the liability and responsibility of returns as well- the onus now falls on the employee to pick his or her own selection from the alternatives offered. However, most employee are woefully unprepared (read unknowledgeable) about investments, and are simply picking, normally, the least risk. In most cases, that doesn't work since the least risk means, normally, the least return. And do that over a period of time- for example all of an employee's working years- and they won't have enough money for retirement. Well, Congress, in a atypical lucid moment, said that if ER's wished to use 401(k)'s and shift the responsibility for investment selection to ER's, it must provide investment instruction to their EE's.

Code section 404(c) elaborates on the requirements and simplistically states what must be provided. The basics are independent entities and qualified instructors. While some companies have indicated that they are already adhering to the 404(c) guidelines (they became mandatory in 1995), I have had the opportunity to review several presentations by three top 500 companies to their employees. Bottom line is, someone hasn't done their homework. The presentations not only omit many areas required by 404(c), but the presentations are made by instructors with a total of only three days of training on investments. They may be able to parrot some investment material and "satisfy" most of the employees that they may know something, but the rest of the EE's will recognize that a good many of their questions about basic investment knowledge is going unanswered- or was answered incorrectly. These errors will unquestionably submit the company to liability later on since there is no question that a judge, jury or arbitration panel would see a total lack of capability on the part of the instructors. The problem seems to stem because someone in personnel hasn't even bothered to get a copy of the ERISA code. But I am not the only one that is voicing a concern. The Department of Labor and the Securities Exchange Commission are also reviewing how well companies are meeting the aim of regulators. To quote from one report, "they are particularly concerned that participants may not be getting enough information presented in a form that can be understood by most participants. In general, participants invest too cautiously so their investment returns are not even keeping up with inflation, which in turn will have a significant impact on their retirement savings. The cautious plan sponsor should not only comply with the specific 404(c) requirements, but go the next step to help employees develop a solid foundation on the rudiments of investing." (emphasis mine).

Another problem is the use of single issue securities- company stock. In this case, the EE's are focusing a lot of their retirement on their own company's stock. That is a radical difference in risk since the use of single issues securities is roughly 70% higher than the use of the S&P 500 index fund market risk. Does that mean risk is being adequately portrayed in the educational seminar? Of course not and leaves the company liable for the excessive risk if an EE's portfolio drops.

401(k): Of companies with over 5,000 EE's, 96% offer 401(k)'s; firms with 1,000 to 5,000 are at 78%. Only 17% of companies under 100 EE's offer 401(k)'s. Some new plans cost $1,300 for setup and $18 per EE per/yr.

CFO magazine points out that 84% of 401(k) plans offer four or more investment options. GIC's are still the top offering at 84%, then index funds at 63%, balanced funds at 61% and growth stock funds at 54%.

But here is something REALLY new. Two NY firms are allowing retirees to use their 401(k) money to purchase additional monthly benefits in their corporate pension funds. Employees can take their pre tax income in an irrevocable transfer to an annuity which will guarantee a payment for life. However I find a problem with this. While the firm allows the purchase of the annuity without commissions or transactions fees, I still bet most of the retirees don't recognize the inherent problems with using primarily annuities for retirement- low potential returns and lost liquidity.

401(k): By the year 2000, employees will be managing $1 trillion of their own retirement money. But employees are woefully ignorant of what do. John Hancock study said that 50% or respondents though that money market funds invested in stocks and bonds. 40% didn't now that a balanced fund contained both stocks and bonds. Only 25% knew what to do with bond funds when interest rates dropped.

401(k): (NY Times, Leslie Wayne) More than 40 million Americans now have a 401(k) plan- up from virtually zero 15 years ago. This number exceeds the 36.5 million in traditional plans. Further, the number of traditional plans has fallen by 40% to 99,000 in the last four years while 401(k) plans have grown 12% to 609,000. For about 16 million workers, the 401(k) plan is all they have at work.

"Yet many workers are not setting aside enough money in such plans, they are poorly investing what they do save and are frequently turning to these retirement accounts to cover everything from medical bills to houses and cars." "The result, some say, is a crisis in the making. As corporate paternalism is replaced by employee self reliance, millions of Americans could be left with insufficient retirement savings".

"For many retirees, the money won't be there and this will have a direct effect on most American's standard of living", says Carter Beese, Jr, a commissioner of the SEC commission that specializes in 401(k) plans. "A lot of participants are not doing a very good job. They are not investing well and leagues of them may be retiring at subsistence levels from their 401(k) plans. That has tremendous implications for the economy."

The article addressed what I have also seen with 401(k) participants- the use of low yielding investments instead of higher growth stock. It was really apparent in the mid west where the bulk of employees were using the GIC or Guaranteed Investment Contracts. In other areas, EE's used their company's non diversified stock to the exclusion of anything else (that's a HUGE risk). Ms. Wayne noted that 60% of Texaco EE's go into money market funds or Texaco stock. At Xerox, 60% of EE's money is invested in bonds. At Public Service Electric and Gas Company, 70% is in GIC's.

Other numbers showed that only 35% of Marriott's hourly EE's put money in a 401(k) compared to 70% of management EE's.

The Employee Benefits Research Institute also presented some sorry statistics for those EE's that leave a company to switch jobs. About 38% took their retirement funds and SPENT them rather than transfer to an IRA or their new company's plan.

401(k) BORROWING: Many employees have been borrowing from their retirement plans to fund various causes- too much in fact because they don't have enough left to retire upon. Regardless, is it better to borrow from your 401(k) or from the equity in your home. Follow this, admittedly, simple chart and you'll be able to see for yourself. 21% took a loan from their 401(k) in 1993, up from 15% in 1988.

1. What is your marginal tax rate ________

2. Subtract line 1 from 100% ________

3. What is the annual interest rate you would pay on a home loan ________

4. Multiply 2 x 3. The figure is your AFTER TAX cost of borrowing

5. What is the rate of return on your 401(k) ________

If line 4 is greater than line 5, borrow from your 401(k)

If line 5 is greater than line 4, use a home equity loan. Of course what #5 indicates is what your 401(k) is earning, not what it could or should. Big Difference.

401(k) PLANS: Employees are able to put in $9,240 per year (1995) into a plan and it cannot exceed 25% of pay after the deduction- which amounts to 20% of pay before the deduction. For example, if your pay was $40,000, your deduction would be 20% x $40,000 = $8,000. But that's assuming no employer contributions. If the employer provides matching contributions, the maximum employee contribution is 20% LESS 80% of the matching percentage. Assume your employer matches 5% of an employees contribution. Take 80% x 5%= 4% and subtract that from the 20% = 16%. Additionally, for many large companies, if the employee makes pre tax contributions to a cafeteria plan, the pay on which the contribution is calculated is even less.

RETIREMENT: (MONEY) While almost everyone talks about saving for retirement, few actually practice what they need to do. Peat Marwick indicated that only 61% of employees actually used their 401(k) plans. Also, when asked what the best investment was over the last 30 years, only 36% correctly chose stocks. More than 40% had actually chosen low returning, fixed income investments such as CD's and bonds. When asked what would produce the highest returns over the next 20 years, 29% picked stocks while 25% picked real estate. In fact a surprising 75% thought that buying a house is one of the best ways to save for retirement. Maybe for a short while in the late 70's and early 80's as real estate prices skyrocketed, but most experts now feel that real estate might just simply keep pace with inflation.

ERISA 404(c): This section of the Retirement regulations has some major changes that become mandatory in 1995. As mentioned in previous newsletters, there has been a significant reorientation by corporations away from defined benefit programs (where the corporation takes the risk of investing in order to provide certain retirement monies to its employees) over to defined contribution programs, mainly 401(k) plans, where the employee now must make the investment decisions. Corporations were concerned about still incurring liability if the employee should pick the wrong investments from the selections available. Obviously the concern was well founded since statistics point out that retirement plans are NOT being effectively utilized by employees. (That has been solidly reinforced by my activities over the past 1 1/2 years. While providing basic financial planning workshops for companies such as John Deere, CIBA and HP, I took the liberty of asking attendees what they were investing in, what they knew about stocks, risks and returns, etc. I expected these employees, who are well educated, to show me that they had made some effort in attaining more knowledge. To put it mildly, I was shocked by the dismal lack of preparation and understanding of basic investment principles.) Congress also saw this problem and established some guidelines in 1992 to help companies reduce or eliminate the fiduciary responsibility of assuring that their employees had sufficient monies when they retired. ERISA rule 404(c) effectively says that if a company provides independent instruction about the risks and rewards of the investment selections made available by the company, then they can avoid the liability of future actions taken against them by employees. Here are the direct comments from the Federal Register, Vol. 57, No. 198 of Tuesday, October 13, 1992:

"In general, in order for a participant or beneficiary to exercise control over the assets in his account, the participant or beneficiary must have the opportunity, under the plan to:

1. Choose from a broad range of investment alternatives, which consist of at least three diversified investment alternatives, each of which has material different risk and return characteristics;

2. give investment instruction with a frequency which is appropriate in the light of the market volatility of the investment alternatives, but not less frequently than once within any three month period;

3. diversify investment within and among investment alternatives and

4. obtain sufficient information to make informed investment decisions with respect to investment alternatives under the plan." (emphasis mine)

Where I think many companies will fail to avoid liability is in the area of providing investment advice. "The Department has concluded that fiduciaries of an ERISA section 404(c) plan should have an affirmative obligation to ensure that participants and beneficiaries are provided or can obtain basic information concerning investment alternatives made available under the plan. The Department is persuaded that merely referring participants and beneficiaries to a source for investment information is insufficient to ensure that participants and beneficiaries are in a position to make informed investment decisions".

Additionally, "a description of the investment alternatives available under the plan and, with respect to each designated investment alternative, (requires) a general description of the investment objectives and risk and return characteristics of each such alternative, including information relating to the type and diversification of assets comprising the portfolio of the designated investment alternatives. This requirement is intended to ensure disclosure of the most basic of information necessary to a participant's or beneficiary's investment decision."

There are still grey areas that corporations are confused about, most notably who can provide the information to the employees. Well, I can tell you who can't. Brokers can't for one. They do NOT have the requisite training to provide the information needed (you need to know what diversification actually means for example. Check prior newsletters for the answer.) Secondly, a registered rep almost always have an underlying reason for attempting to provide such information- commissionable sales, if not now, at least when the employee is retired and has his whole retirement plan to "invest". That conflict of interest will taint the release of fiduciary obligation by the company. Secondly, the Department has said that using the provider of the investments for instruction may not work either- Fidelity Funds for example. If the instructors are not independent, "it could hinder a plans' ability to assume fiduciary liability protection." Lastly, any Tom, Dick and Harry firm that wants to provide info will almost always have problems with the minimum background necessary to provide competent instruction (Certified Planners, ChFC, Series 65 license ). Certainly, if they have never done professional instruction and also merely provide moronic written text, the employees will be asleep in five minutes, never get what they need and the company will still be on the liability hook. Employees are not saving sufficiently in retirement plans. CFO magazine noted that in a John Hancock recent study, 44% of 401(k) participants said they held no equity holdings at all. About 70% of current contributions are invested in low yielding income funds according to the Wyatt Co. Worst of all, younger and lower paid employees put more than 90% of their funds into low yielding investments- almost opposite to what they should be doing. CFO commented that now that communication on investments is required by law- and literally everyone is getting into the game of providing the various services to do so- very little has changed in regards to investor patterns. A survey by Access Research noted that asset distribution has changed little from 1989 through the end of 1993. Equity investments increased just 8.2% to only 23.8% of the entire portfolio. But I bet that a good part of that was due to a continuing upside stock market and a significantly lowering interest rate. If the study had also included 1994, I just bet the statistics showed a significant reduction in equities- and I think that will continue for a good part of 1995.

Fund Type	1989	1991	1993
Equity	9%	11%	16%
Company Stock	29	25	24
Bond	5	5	7
Balanced	11	13	13
GIC	32	31	27
Money Market	9	9	7
Other	5	6	6
Total Equity Investments	44.6	43.8	47.9
Total Equity Exclude Company Stock	15.6	18.8	23.8

Part of the problem, according to CFO, is that instructors miss the mark because they do not identify the external pressures on the employees- college expenses, home repairs, medical emergences- and the fact that employees can and DO borrow too much and too frequently from their 401(k). The problem is exacerbated since there is much more job volatility than in past years. As such, when an employee leaves a firm, he or she must, in most cases, transfer their 401(k) out of the previous firm to some other place. In rare instances, the new firm will accept the old funds and simply incorporate them. Most times, the employee should transfer them, tax free if done right, to an IRA. In fact, Congress installed laws to make it very onerous for someone NOT to do so. But a survey of the Employee Benefits Research Institute in 1993 said that less than 1/3 actually transferred the funds- most either spent the money or put it towards house and debt payments. Frankly I can only surmise they are doing this because they have received- or not looked for- adequate help in identifying the huge tax burden in doing so. Not only do they face ordinary income tax, but a 10% penalty if under age 59 1/2.

Part of the problem- as initially addressed above - is the ability to take a loan. But it is exacerbated because the companies and 401(k) vendors actively promote the loan capability. About 75% of all 401(k) plans offer loans- and normally at below market rates. The Profit Sharing Council of America says that about 30% of all participants have loans outstanding at any given time- the average balance being $4,000.

Some companies have altered their education programs to address some of these issues, but they all say that the best form of education is the direct instructor to employee seminar. Unfortunately, here is certainly one of the major crux's to these presentations. Most are done by individuals who have little, if any, background in investments, securities or planning. Mostly they are parroting some minimal training where they might have had just two or three days of instruction on investments. That's not only ludicrous for the company to allow that (the reason it happens is that the benefits people are NOT doing their homework in reviewing the instructors or firms) but it also subject them to continued fiduciary liability for any losses sustained by the employees. the company.

There are two parting comments from the article: "Barring a dramatic denature, the task of educating employees about their future welfare won't get easier any time soon, but likely will get harder." And the last is a quote from former SEC commissioner J Carter Beese Jr. who said if employees can't afford to retire, businesses will bear the burden, either through lawsuits or through pressure to retain older employees past retirement age. "I believe this is a ticking time bomb for corporations across the country".

PENSIONS: As stated previously, defined benefit plans have been reduced in number and defined contribution plans (where the employee must decide how to risk their money) have increased. Here are some numbers. From 1986 through 1991, employers terminated about 1/2 of all defined benefit plans leaving 99,000 in place. Workers in such plans dropped from 30.2 million in 1984 to 26.1 million in 1992. Defined contribution plans- mostly under the guise of 401(K) plans tripled from 1975 to 1992 to 609,000 while the employees involved increased form 11.2 million to 35 million. Defined contribution plans are more advantageous to workers who change jobs frequently- more so the women who may have to change jobs due to children, husband's work, etc.

401(K): (1996) I have written about this before and it relates to the increased costs by employees of using a 401(k) at work. An article in Investment Adviser note that "the growing expenses that participants are forced to pay for 401(K) plans have received little attention. Investors haven't noticed yet. They haven't figured out what is happening to them. Participants are not aware of what they are paying and in the recent bull market, their tolerance for fees is growing."

Further, the article says that "although plan sponsors are permitted to pay asset management fees to bank trust departments and insurers, the 1974 ERISA act does not permit sponsors to pay the mutual fund expense ratio. The individual participant (employee) must pay it." Therefore, company sponsors who are using mutual funds, are pushing off the fees to the employees. Some companies, even those who would like to do "the right thing" are so woefully ignorant of investing that they are incapable of determining what to do or who to use. So higher and higher fees get passed on. Others simply don't care how much these fees are since as long as the EE pays it and nobody says anything, who cares? And the bottom line counts no matter what. My point is that the new law regarding 401(k)'s clearly states that it is the company's responsibility to provide EE education about investing. Therefore, the statement requires the ER to PAY for education and within such context, to make known any exorbitant or excessive fees that the EE is being forced to pay. I submit that the ER's must provide commentary on these fees under their fiduciary obligation.

The article also pointed out that there are three different types of fee and fund structures being used. One with deferred sales charges (back end loads), another as mutual funds under a wrap account with 65 to 165 basis points on top of expense ratios and the last with special classes of funds that add 12b-1 fees of 25 to 65 basis points for record keeping and distribution. They finally ended by stating that "most reporters have been telling employees for years that 401(k) plans are the best thing since sliced bread. I predict that for the next several years, you will be reading in the press about what is wrong with 401(k) plans. And it will start with how much they cost."

I'll go further. Not only will this happen, but company's will be held liable for fiduciary violations of code section 404(c). Further , sooner or later, they will have to provide competent instruction to EE's versus the sophomoric Pablum that most are now receiving.

401(K): (1997) If you are a heavy hitter in an organization, you may still put away monies to your 401(k). We'll also assume that your employer contributes. But here is how you can make a mistake in establishing your contributions to your 401(k). Assume you make $100,000 a year. You decide to put away $1,000 a month to your plan with you employer matching $500 a month (10% maximum pretax salary into the plan along with 5% employer matching). Unfortunately, by October, you have reached you maximum contribution for the year of $9,500. So you stop- but so does your employer. You are shorted $500 by the employer for the last three months- $1,500. How to fix? Simple- adjust your contributions to last for the entire 12 months. You then pick up the extra $1,500.

401(k): (WSJ 1997) Hard to believe this could happen, but the laws for 401(k)'s are not set up the same as regular pension plans. For example, instead of a 10% limit on certain type investments- such as company stock- there is no such restriction. As such some small funds have been "messing" with the retirement funds of employees and bought some unbelievable investments for the plans use. Such investments" include a winery, parking lot, antique violins, trailer parks, Persian carpets, palms trees and Heaven knows what else. It's amazing what ego, investment naivete, financial pressure and outright stupidity can do. However a proposed change in the law is being thwarted by some companies since they like their big EE's to load up on company stock. A September WSJ article noted that an investigation of 246 of the largest employers with 401(k) plans showed

INVESTMENT PERCENTAGE

Company Stock 42%

GIC 24

Equity 18

Balanced 6

Bonds 4

Cash 3

Other 2

Another study indicated that about 25% of the $675 to $700 billion in 401(k) plans are invested in ER stock. This is horrendous diversification. Education of the employees has a long way to go. Law suits against employers have a long way to go.

401(K): (WSJ 1997) There has always been a disparity between the rich and poor in regards to the amounts contributed to 401(K0 plans. A KMPG study showed that 90% of those earning $75,000 or more participate in their company plans compared with 67% of all workers offered such plans. The Labor Department's 1993 Current Population Survey shows 70% of the 2.2 million workers earning more than $75,000 are offered a plan while only 10% of the 15 million workers earning under $10,000 are offered a savings plan. KPMG's study also shows that companies with at least 200 employees, highly paid workers contribute, on average, 6.7% of income while the non highly paid contribute only 4.73%

KMPG showed a gap between participation rates among the highly paid (more than $66,000) in 1966 and the lesser paid of 26%. In 1995, the gap was only 14% with 77% of highly paid participating in their plan compared with 63% of the lower paid. The gap has been widening since 1993. In part it is due to the poor presentation of facts on investments to the lower paid workers.

401(k) CONTRIBUTIONS: (Watson Wyatt Worldwide, 1998) A study found that employees who received customized communications about the 401(k) plan contributed 2% more than employees who did not. If an employer made a matching contribution from 25% to 100%, the results were similar (as would be expected when employees are getting "free" money). As study of 40 year olds with 25% matching contributions and no communications contributed 3% at the $25,000 salary level and 4.5% at the $75,000 level. With a 100% matching contribution and not communications, the rate was 5% at the $25.000 level and 6.5% at the $75,000 level.

MORE 401(K): (1998) Dalbar Inc said in a study of 1,143 employees saving for retirement that they wanted more investment options- particularly in foreign funds. 46% wanted to see an unlimited amount of changes in the frequency of changing funds. Unfortunately, they might not have a clue as to what is really going on. First of all, many U.S. funds have foreign exposure already and therefore partial diversification already exists. More importantly, many foreign funds had a relatively high degree of correlation so the asset allocation might be limited in any case. True, the Asia meltdown showed a negative correlation- but also negative returns. As to the requirement of "market timing"- doesn't work.

410(k) LOANS: 1998

Percent of Employees with loans 1992- 25% 1996- 29%

Average Loan Balance $4,456 $6,174

This could spell real retirement trouble later on since employees who take out loans do not pay them back- or pay them back in full. Hence, less money for retirement overall.

401(K) SURPRISE: (1998) I thought the employer match would be one of the very key features that would make employees happy about investing in 401(k)'s. Maybe not since a study by JP Morgan Investment Management said that accounted for only 20% of employee satisfaction. The study noted that the optimal number of funds is 11 (how one determines that is beyond me, but a solid 10 to 15 funds seems about right). A USA study showed that the typical plan offered 6 funds compared with 8 for the typical manufacturing plan. Two thirds of the plans offered a foreign fund.

MORE 401(k): 1998 For all households and for homeowners, we find that to the extent that eligibility for 401(k) plans raises households' financial assets, the increase is generally offset by reductions in housing equity and in particular by increases in mortgage debt. For renters, the results are somewhat mixed. Because homeowners hold the vast portion of 401(k) balances, our results indicate that, at best, only a small proportion of 401(k) contributions have represented net increments to saving. The results also suggest that the response to 401(k)s can vary across households and highlight an important interaction between household debt and saving.

401(K): (1998) I have harped on the excess fees being charged by some funds for 401(k) plans- and the fact that the employers are using such funds to avoid paying the fees identified by the Department of Labor (DOL) for which they are responsible. A WSJ article noted that 12b-1 fees are being kicked back to employers in the form of reduced costs for record keeping- if paid at all. These are called "soft dollar costs" and the DOL is finally taking a hard look at these. Companies with 100 employees have seen 401(k) costs climb to $54.42 per account in 1997 from $49.00 in 1995. Companies with 500 employees have seen costs rise to $37.16 from $36.58. The "problem" is even more severe since, even though funds have gotten larger and the fees should be lower due to economies of scale, such overall fund expense have been rising. Expense ratios have climbed to 1.11% in 1997 from 1.09% in 1995.

The article also provided the highest and lowest costs: Lowest cost provider as 0.53%; highest at 2.56%

Record keeping low at $0 and highest at $75.

Why the difference- outside of pure greed? Easy. What does a Corporate director, president, human resource person know about investments, fund expenses, diversification, asset allocation, etc??? You can almost bet they picked the funds because of inadequate research through inadequate knowledge of investing.

401(K): 1998 (USA) From just 25 years ago, the 401(k) plan has now seen about 25 million people invest over 1 trillion dollars. The USA article noted however that there is a vast disparity in the amounts offered by one employer versus another that could ultimately lead to a "wider gap between the rich and the poor". Unfortunately the workers probably needing the pension plans the most are in the industries- retail and service- that pay the least in matching contributions and have the strictest limits on how much they can invest. What was most striking was the study showing the differences a retiree might get from two different companies- Allied Signal and Wal Mart. Both employees earn $30,000 a year and contribute the maximum allowed by the company- 17% at Allied and 10% at Wal Mart for 20 years. They get 5% annual salary increases and the investments earn 8% annually. But due to the different matching, the Allied employee would have $539,000 at retirement versus the Wal Mart with $216,000. However, if you were to take the average salaries for manufacturers at $36,235 in 1996 and the average salary for retail at $15,215, the differences are even more pronounced at $652,000 after 20 years versus the retail employee at only $109,431.

Nationally, 41% of workers have a 401(k) plan. A KPMG Peat Marwick study showed that 90% of employees earning more than $80,000 a year contribute to a 401(k) versus 64% of employees earning less.

U.S. DEPARTMENT OF LABOR: (1998) In 1985 there was $55 billion invested in 401(k) plans; in 1995, $675 billion, and by the year 2000 is estimated that the account will grow to $1.4 trillion. From 17,000 plans in 1984, the number has grown to 250,000 in 1997. Some estimate that the 401(k) plan market encompasses 26 million participants with an average account balance about $65,000. The Profit Sharing/401(k) Council of America reviewed 689 qualified plans and noted that the number of investment options was growing from 34% of plans offering five or more funds in 1991 (three are required) to 81% in 1996. The rate of participation in these companies was 84%. Most interesting is that an average of 28% of companies used just one mutual fund family- down from 31% five years ago. This is showing up with the additional competition of the various fund families and requirements by employees that they have more options (though knowing how to use them is an entirely different subject.)

401(k): (1998) Only 40 % of 401(k) plans invest in Mutual Funds. The other 60 % consists of variable annuities, guaranteed investment contracts and bank collective funds.

At companies with 100 employees, the percentage of administrative costs on 401(k) plans have jumped more than 10 % in the past two years, from $49 in 1995 to $54.42 in 1997 according to HR Investment Consultants. The company noted that there were huge discrepancies in fees ranging from $176 to $767 per participant, with the average cost being $411 annually.

401(K): (1998) Of 130,000 companies with less than 100 employees, only 26% have 401(k) plans. Of the 1.7 million companies with less than 50 employees, only 11% have such plans.

401(k): (1998) About 29% of people enrolled in 401(k) plans have loans averaging about $6,000. According to one firm, the number of loans have remained unchanged for about the past four years. Normally, you can borrow as much as half of the balance in your 401(k) plan up to $50,000. The interest-rate you get charged is the prime rate plus 1%. The loan must be repaid immediately if you change jobs or within five years if you remain with the same firm. However, if your company allows, you may use the money to buy your first home and you may be able to get up to 30 years to pay the money back

401(k): (WSJ 1998) 60% of departing employees who had 401(k) plans take the money and spend it for credit card bills, home purchases, etc. And 80% of employees with less than $3,500 in such a plan when they left spent all their money. Only 4% with assets over $100,000 did. Unfortunately, the new law allows employers to terminate plans with less than $5,000 when an employee leaves, so low wage worker will be hurt all the more since, when they get the money, they almost undoubtedly will spend it rather than rolling it over to an IRA.

401(K): (Business Week 1998) There has been a lot of controversy regarding whether or not investors in 401(k) plans were in for the long haul or would change investments at a whim. Well, when the market dropped in October last year, they tried to do a lot of market timing. During those first few days of the correction, trading volume was four times the average level. The survey noted that a lot of money went back in into international markets and some company stock in the hopes of catching the bottom of the drop. Rebalancing is fine when looking at the long term, changes in P/E Ratios, economics and so forth. But you need to remember that asset allocation constitutes about 94% of the return on a portfolio. Market timing is a scant 2%. 4% is for stock selection. But the 6% of their portfolio is where people put at least 75% of their efforts. Illogical

401(k): (1998) One VP of financial education said that "participants attend boring seminars describing the plan and its investment options....." All too true. But that is because the companies have not done enough research to seek out those individuals who not only know the subject matter, but can teach it effectively as well. Most human resource people apparently think anyone can provide instruction that will suffice under 404(c) codes. But just you wait until a few law suits happen and they will change their tune real fast.

Here is another reason for some suits- fee, fees, and more fees. There are now about 900 billion in assets distributed over 250,000 plans for over 25 million participants. You'd think that with that number there would be some economy of scale regarding lowering of fees. But for many participants, the company sponsors simply found a way to get the employees to pay for all the services. However, finally, the Department of Labor is looking into the "problem". Olena Berg, Assistant Secretary of the Dept of Labor for Pensions and Welfare Benefits asked "are employees paying too much? Are they ill informed? Are fees buried or hidden?" Does the Pope wear a pointy hat?

One 401(k) research firm noted that small firm employees get hit the hardest with fees reaching 2.87% of assets managed. The lowest fees were 0.73% of assets- the average 1.29%. Now those costs were just for managing the fund. There are also administrative costs such as record keeping that may be charged directly to employees. In fact Access Research noted that the charges to employees for such work was now being paid by 24% of employees- up from 7% just two years ago. And employees may get charged indirectly. Some fund companies like Merrill Lynch and Fidelity low ball administrative costs and then try to make them back by high expense ratios. Perfectly legal- though not ethical.

Watch for changes as time goes on with reduced fees and more insightful and beneficial education. It's about time.

401(K) STATISTICS (Hewitt Associates 1998)

Kinds of Funds- How many plans offer these options

1995 1997

Money Market 51% 51%

Stable Value Fund 55 66

Long Term Bonds 31 38

Balanced 66 76

Lifestyle Fund 9 19

Equity Index 45 49

Large Cap Equity 52 61

Mid Cap Equity 58 34

Small Cap Equity 40 41

Non U. S. Equity 36 47

Employer Stock 36 52

Average Number of 401(k) Investment Options

1993- 4.2

1995- 6.1

1997- 8.0

Employer Match- How employers match their workers contributions

Fixed Match - 67%

35% of employers contributed $.50 for every $1 invested by employee

14% of employers contributed $1 for every $1 invested by employees

18% of employers offered a different fixed match

Graded Match- 14%

(Graded means employer contributed varying amounts. For example, $1 for each of the employees first $3; then $.50 for next $3)

Match based on Company Performance- 14%

Match based on length of Employee Service - 6%

Other Match- 10%

No Match- 7%

How Often Can a Employee Transfer Money Between Funds

Daily- though 22% of plans limit the total number of transfers in a year 64%

Monthly 17%

Quarterly 15%

Other 4%

MORE 401(K): (1998) The IRS is apparently stating that employers can actually enroll an employee and take 3% of their salary into the account WITHOUT their initial approval. The employees could then subsequently decline to participate. Might not be a bad idea since it could make some EE's save money.

MORE 401(k): (1998) I have harped on the excess fees on 401(k) plans for years and it looks like the Department of Labor is finally getting around to focusing on the problem. The Labor Secretary stated that "higher fees do depress earnings and eat way at a retirement nest egg." and "what appears to be a small fee can make a big difference". Typical fees range from 0.2% of workers account balances to more than 2%. And because 401(k) statements are not required to list management fees and who pays, workers have not known how hard they have been hit. In fact, in 1992, only about 32% of asset management fees were passed on to workers- in 1996, it was then up to 54% (and I bet it is higher now).

Frankly, I think this gives more ammunition to workers against companies that have violated their fiduciary obligation to employees. I have repeatedly stated that companies are NOT doing their job in effectively explaining literally any aspect of 401(k)'s and leaves them exposed to potential liability. This was reinforced by the DOL's further commentary:

"You should be aware that your employer also has a specific obligation to consider the fees and expenses paid by your plan. ERISA requires employers to follow certain rules in managing 401(k) plans. Employers are held to a high standard of care and diligence and must discharge their duties solely in the interest of the plan participants and their beneficiaries. Among other things, this means that employers must:

Establish a prudent process for selecting investment alternatives and service providers;

Ensure that fees paid to service providers and other expenses of the plan are reasonable in light of the level and quality of services provided;

Select investment alternatives that are prudent and adequately diversified; and

Monitor investment alternatives and service providers once selected to see that they continue to be appropriate choices.

Another issue addressed by the DOL was a question that employees should ask themselves regarding their employers required education for 401(k) plans:

"What types of investment education are available under your plan?"

Considering what I have seen, such offerings are pathetic and would not hold up in court as reflecting what a prudent man would have offered. Further, I believe that an employer would be held to higher standards as an expert in defining the risks and rewards of investing in conjunction with the investments offered. But literally none of the seminars I have seen address alpha, beta, correlation, asset allocation, standard deviation or the other fundamental of investing. And don't tell me these subjects cannot be taught to an unsophisticated audience. I have done them for years to all types audiences. The difference  in my doing the instruction is, obviously, I charge outright for them- hence they cost a corporation more. But if you are a corporation, think about this- pay an expert to keep you out of problems now or pay an attorney, court fees AND fines and penalties to your employees later when the market changes and you get sued. And I can tell a lot of corporate human resource and attorneys-YOU WILL BE SUED.

401(K) PLANS: (1999) (Spectrem Group) They now total about $1.8 trillion at the end of March 1998. This is up from $985 billion at the end of 1997 and $475 billion at the end of 1993. There are about 270,000 companies offering 401(k) plans to more than 25 million American workers. More than 37 % of the 401(k) assets are invested in mutual funds.

401(K): (1999) (Tim Younkin) "Employees in 401(k) plans are protected by the Employee Retirement Income Security Act (ERISA). This 1974 law requires employers, investment advisers, and plan administrators to put employees' interests first in managing retirement savings plans. Other qualified retirement plans such as 457's and most 403(b) plans are exempt from the duties mandated by ERISA. Insurers today hold 85% of the 457 and 403(b) market but only control 25% of the 401(k) market. One reason is that ERISA requires 401(k) sponsors to safeguard employees' interests when selecting outside firms to manage the plan's investments and those interests are rarely best served by variable annuities. One thing ERISA makes clear is that employers are fiduciaries. That means they must act responsibly to protect the workers enrolled in the savings plans. Unfortunately, very few employers do."

401(K) PLANS: (1999) An article in CFO magazine commented that most companies are not providing sufficient education to employees. Absolutely true and is simply indicative of the industry overall that has never provided adequate knowledge. And that dovetails with literally no education that covers the basics of investing- alpha, beta, correlation, diversification, etc. for example. Certainly, if companies do not present standard deviation to their participants in an understandable and usable format, they have not provided a key educational element to risk. (Good god! How is anyone going to define investing and investments unless you have a foothold on risk? How can you relate to asset allocation unless you discuss correlation? And how can you do anything without addressing current economics? YOU CAN'T!) Hence employees may do the wrong thing at the wrong time for the wrong reason. Additionally, "plan sponsors fear that if participants outlive their savings, they'll argue that employers should have warned them that they weren't investing correctly. That is a distinct possibility whether or not the recent turmoil in the stock market proves to be the start of a prolonged downturn, say industry experts." "Thirty years from now the liability will fall on the corporation," says Brian Roehl, a partner at investment-education firm Educational Technologies Inc. because participants have underfunded their retirement due to improper education. "Sooner or later, the attorneys will grab hold of this, and it will be just like the tobacco lawsuits."

I'll say one thing for 401(k) plan participants. Unless your plan has at least an index fund (S&P 500 or perhaps extended market (Wilshire)) and an index medium term bond fund, your corporation has NOT done any realistic analysis for the plan nor for the employees. You CANNOT use managed funds with high fees without dismissing the use of index funds. Corporations need do some more homework

PENSION PLAN NUMBERS: (1999) (Cerulli Associates). 401(k) plans will grow at a compounded annual rate of 13.5% till 2001 and will then account for $1.5 trillion in assets, up from $975 billion at the end of 1997. Defined contributions will amount to $2.2 trillion by 2001, up from $1.5 trillion in 1997. Traditional pension plans are growing more slowly growing to $1.9 trillion by 2001, up from $1.5 trillion in 1997

401(K) EDUCATION: (1999) Ain't working- and considering what I had seen in the past regarding the instructors and material- the following was almost preordained. A Texas benefits administrator reviewed the investment activity of two major companies and found that the employee returns in the top quintile earned returns 20% higher than those in the bottom quintile. But what is most distressing is that the (supposed) top preformers actually underperformed the S&P return by a full 10% with the bottom quintile earning LESS than a money market return. A mutual fund company noted that "sizable income disparities among retirees could result in a rash of lawsuits against employers by employees claiming that they were ill equipped to take on the responsibility of making investment decision."

401(K) ARTICLE:  (1999) I have felt that 401(k) instruction is pathetic, sophomoric and not going to insulate a company from fiduciary obligation because so many employees were never really instructed as to what to do, why and the ultimate repercussions. Here is a definitive article on the subject and how most of it has gone bad and left employers with liability. In part, "And in all likelihood, 404(c) won't even protect companies from suits filed by employees unhappy with their investment returns. Why not? Let Brooks Hamilton explain. "Look at the disparity between the results for the top and bottom plan participants," he says. "With a gap that wide, how can a company possibly argue that it did an adequate job educating the bulk of its employees? A good lawyer will seize on the gap as prima facie evidence that the corporation didn't fulfill its responsibilities.

401(K) UNDERSTANDING: (Hearst Business Communications 1999) 83.2% don't know what drives stock prices up and 71.7% don't know what happens to bonds when interest rates change; 79.4% don't know what a GIC is and 68.1% don't know what a money market fund is. Only 31.5% believed their employer provides good investor information.

401(K) FIDUCIARY RESPONSIBILITY: (1999) A Federal Appeals Court is effectively indicating that not only must an employer provide education but also tax and financial planning as well. The 8th District Court of Appeals noted that U.S. West had breached its fiduciary duty by NOT informing employees about the tax consequences of taking lump sum retirement distributions. A CPA commented that "In all my years of doing taxes, I never had a employer tell the employee what would happen regarding lump sum distributions. People are very uninformed." The article noted that "Plan sponsors should ask themselves: Are you providing your plan participants with the kinds of education they need to make informed, personal financial decisions? If in doubt, get professional help...."

401(k): (1999) Mentioned previously, many early retirees take a retirement plan and spend it rather than rolling it over to a IRA. About 28.3% of recipients rolled about 56.3% of their 401(k) dollars: 11.2% spent 10.9% on financial investments; 6.6% spent 5.6% on a new home; 7.8% spent 6.5% on other investments; 17.3% took 7.5% to pay off debts and 28.8$ took 13.2% and just consumed it in other areas. Among the lower income. only 16% rolled over a pre retirement lump sum to an IRA- representing 31% of their distribution assets. (FED Bank of NY)

401(K) ELIGIBILITY: (2000) Some plans allow new employees immediate 401(k) eligibility. (CFO) "But most employers have shied away from extending the benefit instantly to recruits, because enrolling new hires can threaten a company's ability to pass nondiscrimination tests. New hires, with limited salaries, are often reluctant to put dollars away for the future. That inhibits the ability of so-called highly compensated employees (HCEs), who earn $80,000 or more annually, to contribute as much as they'd like. One of the discrimination tests, known as actual deferral percentage, or ADP, limits HCE contributions to no more than two percentage points of salary beyond non-HCE (NHCE) contributions.

There are two safe harbors to help employees meet nondiscrimination testing while encouraging new-hire enrollment. The first requires sponsors to support what is called a "rich" plan, often prohibitively expensive. Employers must contribute at least 3 percent of every NHCE salary or match 100 percent of the employee's contribution up to an amount equal to 3 percent of compensation and 50 percent for the next two percentage points of compensation.

The second safe harbor will probably prove to be more popular. It allows companies that provide new-hire eligibility to exclude the NHCEs among them for the purposes of ADP testing."

EMPLOYEE INVESTMENT EDUCATION: (2000) In June, 1998, the U.S. Court of Appeals for the Ninth Circuit held that the sponsor of an early retirement plan had breached Employee Retirement Income Security Act of 1974 (ERISA) fiduciary duties by failing to warn retiring employees of the serious tax consequences of lump-sum distributions.  In Farr v. US West Communications, the U.S. Court of Appeals for the Ninth Circuit found that US West had breached its ERISA fiduciary duties by failing to warn early retirees of the tax consequences of lump-sum distributions. However, because ERISA allows plaintiffs no recourse to sue for damages, the court found there were no remedies available to the plaintiffs.

And I bet for literally all the major companies, there is NO identification of how to take out employer stock that may have been offered as part of a 401(k) or in another pension plan. If you are working for Ford, IBM, HP or anything of the like, you had better be aware of the various change in basis allowed for employer stock.

401(k): (2000) As of year-end 1998, 24 percent of 384 companies surveyed by the Profit Sharing/401(k) Council of America (PSCA) grant newcomers immediate 401(k) eligibility. About 32% offer plan participation within three months, according to PSCA. In contrast, 48.3% of companies surveyed do not enroll employees in plans until one year or longer on the job.

401(k) and 404(c): (CFO) (2000) An institution was sued under section 404(c) for (supposedly) failing to follow its fiduciary guidelines for the betterment of its employees. The employees attorney noted, "Financial institutions have to exercise the same level of prudence as managers to select investments for employees as they do when they manage other pension plans". "They still have to evaluate the fund and have a diversified selection of investments that are performing reasonably well," "Make sure you can demonstrate that you have a basis for selecting the particular funds in a particular plan."

All this legal wrangling points to at least one unequivocal observation: "For all employers, the suit demonstrates how important it is to prudently select investment options under a 401(k) plan."

Frankly, I think that literally all employers are under a major liability problem. Why? Because if you do not understand diversification, you have already breached your fiduciary obligation in trying to determine a viable fund in the first place. The only offset is the fact that none of the consumers know what it means either- and neither do the attorneys.

401(k) (2000) Increases (NY Times) The proposed Portman-Cardin Pension Reform Plan would raise the $10,000 limit on annual tax-deductible savings in 401(k) plans to $15,000 and, for those age 50 and older, to $20,000.

"Only 4 to 11 percent of 401(k) plan participants save the maximum now, according to the Employee Benefit Research Institute. Workers save an average of $3,000 each in 401(k) plans, the institute estimated. The additional $10,000 that older workers could save each year would add $360,000 to a retirement nest egg of someone who is 50 years old, retires at 65 and earns historic stock market returns.

Current law generally limits the total amount that a worker and an employer together can set aside in a retirement plan to 25 percent of pay up to a maximum of up to a maximum of $30,000 of savings. Portman-Cardin would increase that to $45,000.

Raising benefits at the top means that 62 percent of the new tax breaks would flow to people in the top 10 percent income group. The middle fifth of households would get just 3.2 percent of the tax breaks."

Comments from the FED Board of Philadelphia's recent Business Review on Corporate Profits: "The value of the stock market may have risen over the past few years partly because of forecasts of high corporate profits. The results concerning forecasts of corporate profits from the Survey of Professional Forecasters suggest that such forecasts have been fairly accurate, though certainly not perfect, over the last 30 years. "

401(k) Plan Participants; Characteristics, Contributions and Plan Activity (PDF) Investment Company Institute, 2000. The 59-page study was based on interviews with 1181 randomly-selected households in which the primary decision-maker was a 401(k) participant.

A separate commentary of the study by Richard Ferri noted, "I believe employers need to do a better job of educating employees on the historic risk of the stock market, or suffer the consequence of employee class-action lawsuits in the coming years. While many investors have enjoyed abnormally high stock returns and historic low volatility during the economic expansion, there will be a deep bear market eventually. Those 401(k) participants who unknowingly assume too much risk will find themselves losing more than they should in the bear market, and that means trouble for plan sponsors."

I have said this for years to absolutely no avail.

401(k) fees (USA Today 2000) Last year, 38% of companies with 401(k) plans charged participants for record-keeping fees, up from 22% in 1991, according to a survey by Hewitt Associates. And 41% charged participants a trustee fee to keep custody of the plan assets in 1999, up from 27%.

I have stated for years that there exists a fiduciary duty by the corporation to its employees in the implementation and use of a 401K. Further, that the superficial and sophomoric investment presentations will come back to haunt many a plan fiduciary. If the instruction does NOT address diversification, then the presentation is wanting. If you do not know the numbers- specifically after what Burton Malkiel has recently written, you are NOT an investor. And you will never be one. Right now, the corporations are still paternalistic by NOT informing employees of the fundamentals that they need to have to protect themselves.

High 401(k) fees under attack: (2001) I have repeatedly commented about the excessive fees within 401(k)'s and now the FED is getting into the act. "Pension regulators are taking aim at fees that can cost 401(k) plan  participants tens of thousands of dollars over the course of their careers. The Department of Labor is forcing more employers to refund fees that had been shifted to retirement plans.

401(k) QUIZ (2001) A 28 question quiz covering many different aspects of  401(k) plans

401(k): (Institute of Management & Administration, Profit Sharing/401(k) Council of America 2001) 80% of 10 eligible workers participated in company 401(k) plans during the 1999 plan year

• Pre-tax participant deferrals averaged 5.4% of pay for non-highly-compensated workers, up from 5.1% in 1998 and 4.2% in 1991.

• Employer contributions averaged 4.7% of payroll. Contributions were highest in profit-sharing plans (8.6%) and lowest in 401(k) plans (3.3%).

• Plans offered more investment options to employees: 51.2% offered 10 or more funds, up from 28.8% in 1998. The average number of available funds for participants was 11.5.

• 29.6% of companies offered immediate vesting of 401 (k) plans. Just 9.2% of profit-sharing plans offered immediate vesting; 19.8% of combination plans did so.

• The Internet was used for plan administration by 64% of companies, permitting participants to interact with their plan online. The most common Internet services were balance inquiries (offered by 62.9% of the plans) and investment changes (60.2%).

401(k)'s: (Employee Benefit Research Institute 2001) Of the 39.6 million people invested in 401(k) plans at the end of 1999, the latest year for which numbers were available, 21.5 million, or 54 percent, were held by baby boomers.

But an upcoming study by Laurence J. Kotlikoff, Jagadeesh Gokhale and Todd Neumann said that  investing in a 401(k) can hurt. How's that? Assume a married couple earning $50,000 combined at age 25 will indeed do well in a 401(k) if it returns a steady 4 percent a year. Their lifetime taxes will go down; the money they have available to spend will go up. But if the return increases to 6 percent, their taxes increase 1.1 percent and their available money falls by 0.39 percent. With an 8 percent return, taxes rise 6.38 percent and available money falls 1.73 percent. The extra tax can come from increased social security tax (you do know about that, don't you?). Also the lower tax bracket would reduce the advantage of the mortgage deduction.

401(k) borrowing- (2001) Borrowing doubled between 1992 and 1998. By 1997, 25% of participants had outstanding loans.

Employees don't have a clue: (NY Times 2001) Most employees are unaware that they may be paying hundreds of dollars of administrative fees and even fewer know that fund companies often rebate part of the fees to employers or outside administrators.  

Administrative fees cover the costs of keeping track of account balances, sending out statements and answering questions. For large 401(k) plans, industry consultants say, they usually amount to about 25 basis points, or 0.25 percent of assets

Rebates would never have arisen if employers had not begun shifting administrative costs to plan participants. In 1991, 78 percent of sponsors absorbed these costs themselves. By 1999, only 62 percent of sponsors were doing so.

The trend is particularly noticeable in large plans. By 2000, only 36 percent of plans with more than $1 billion in assets absorbed these costs.

  One-third of plan participants have no idea how much their plans cost, while another third think they are getting their 401(k) plan free.

401(k) Education: (Scarborough Group 2001) Approximately 93% of those surveyed said that attaining unbiased financial advice would be an important addition to their 401(k) plans. Also, 63% of the participants wanted those advisers to be independent of any specific mutual funds. 92% said establishing a relationship with an adviser was also important to managing 401(k) plan.

Participants also griped about poor 401(k) education. An overwhelming 64% of participants said that the quality of their employer’s 401(k) education and services fell between poor and average. The survey showed that 39% of the participants wanted employers to offer professional management for their plans, while 29% said they wanted at least face-to-face contact with a financial adviser. The top issues that consumers were interested in learning about included: retirement planning, market issues, 401(k) investing and college investing.

401(k) for sole proprietors: (2001) A person earning $100,000 in a one-person unincorporated business will be able to put $28,000 or more into a 401(k) in 2002.

Under current law, there is generally a 15%-of-pay cap on the combined sum that employers and employees can contribute annually to 401(k) plans on a tax-favored basis, as much as $170,000 in pay. That 15% cap will rise to 25% (of a higher $200,000 in pay) next year.

But also next year under the new law, employee deferrals won't be counted toward that 25%-of-pay limit -- making it possible for one-person businesses to make a large employer contribution and then also make the maximum $11,000-a-person deferral in 2002 (up from $10,500 this year).

The new tax law also allows people 50 or older to make additional "catch-up" contributions in 2002 of $1,000 a year to a 401(k) plan and $500 a year to a Simple plan, the short name for a program called Savings Incentive Match Plan for Employees.

There are several wrinkles that further complicate the retirement-plan math: For unincorporated businesses, the percentage-of-pay limits apply to compensation after plan contributions are subtracted (and also after deducting one-half of self-employment tax).

Here is a reason why so many people can't get their 401(k) money when they leave a job- voluntarily or are fired: (WSJ 2001) "The law does allow a 401(k) plan to distribute the money in the plan upon termination of employment -- the law does not mandate that."

And the real killer- Legally, plans needn't begin distributing funds to a participant until 60 days after the plan year in which he or she reaches "normal retirement age." Think about that- you're 55 and fired. But you can't get your money until possibly age 65.

If your company goes broke, prepare for a long wait. After bankruptcies or acquisitions, getting proper approval from the Internal Revenue Service to maintain tax advantages can take plans six to eight months

401 (k) (PRN 2001) Small business owners report much lower levels of knowledge about 401(k) plans than their peers. The results of a recent study by Nationwide Financial, a leading distributor of retirement and income distribution products, is spurring a debate centered around which came first -- the decision not to offer a plan or the lack of understanding.

71 percent of the total group reported they were very knowledgeable about 401(k) plans (not a clue). Only 49 percent of small business owners reported a similar level of knowledge (still not a clue).

Small business owners should take the time to learn about all the options available to them, including 401(k) plans, to ensure they are making the best choices for themselves and their employees.''

According to the Bureau of Labor Statistics Employee Benefits Survey, 46 percent of full-time workers in small businesses were covered by a retirement plan in 1996. . ``Lack of knowledge could be a major driver of the decision to not offer any kind of plan. Whatever choice a small business owner makes, it must be based on an understanding of what's available to meet their needs.''

Small business owners often believe 401(k) plans are too complicated to meet their needs.''

The study also found that while 46 percent of small business owners consider a pre-existing relationship very or extremely important to consider when selecting an advisor, only 34 percent of other successful professionals agree with this statement. When choosing an investment professional to meet their needs suggests small business owners consider: certification to perform financial planning, past record of success, and diversity of investment offerings, as well.

401(k) plans: (2001) Investment Company Institute: The average account balance for participants in 401(k) plans in both 1999 and 2000 has remained essentially unchanged. At year-end 2000, the average account balance of the 8.3 million individuals who held 401(k) accounts in both 1999 and 2000 declined 0.1 percent to $58,774 from $58,850 at year-end 1999. The findings contradict a study released last month by Cerulli Associates that said the average 401(k) balance dipped by more than 10 percent in 2000 The new study also showed that older planholders fared much worse than younger ones.

Employers are now getting sued due to losses in a 401(k) plan. (2001) Here is one reason why- nearly one-third of 401(k) assets were invested in company stock as of July 31. ANY employer that has allowed that to happen has breached its fiduciary obligation to its employees. Why? If you are going to offer stock- as a broker, planner, employer, small furry animal- you have to understand the ramifications of diversification. Admittedly its never been taught for licensing to brokers or literally any other entity, but the point being is that once you take on the responsibility as a fiduciary of another, you have a duty to seek out those that do know what it means.

An attorney for employees at one firm noted- "One way a company can get into trouble is if it possesses information about a problem that makes the stock an inappropriate investment, but they do nothing about it." Unfortunately his comments underscores the problem with attorneys, arbitrators, et al, in that, while a companies stock may be a problem in itself, it is the statistical fact that a single issue of stock that quantifies a large portion of a portfolio can push the risk scenario 50% or more beyond that of the S&P 500 index.

Some companies limit the amount of a single issue- Fidelity Investments found that 7% of 401(k) plans limit the percentage of stock in a participant's account. The most common limit is 25%.

401(k): A 2001 survey revealed that currently 42 percent of respondents do not seriously consider reallocating their 401(k) investments after they are established. Eighty-four percent of full-time employees consider it very or somewhat important that a company offer a 401(k) or similar retirement savings plan when making the decision to join or stay with a company.

Seventy percent contribute the maximum amount at which their company matches or more.

55 million employees participate in a 401(k) plan to save for retirement. However, only about half of all employees age 18 and older are now offered a 401(k) or similar defined contribution plan, according to the Profit Sharing/401(k) Council of America.

401(k) Loans (WSJ 2001) About one in five people who can borrow from a 401(k) plan had outstanding loans last year, according to the Profit Sharing/401(k) Council of America. The average loan balance was roughly $6,300.

401(k): (2001)The average 401(k) participant contributes 6.8% of salary before taxes to his or her retirement plan, but the amount contributed by any one participant varies widely by his or her age, salary and plan design, according to a new study. http://www.financial-planning.com/pubs/fpi/20011018100.html

The study found that average 401(k) contribution rates tend to rise with age within all salary groups. Of workers earning $20,000 to $40,000 a year, those in their 20s contributed an average 5.3% to their 401(k) plans, while those in their 50s contributed 7.6% on average. Workers in their 20s earning between $80,000 and $100,000 contributed an average 6.8%, while those in their 50s making the same amount contributed an average 7.3%.

Within all age groups, the average contribution rate tends to rise for salaries up to $80,000 a year, and then falls thereafter. For example, employees in their 40s earning $20,000 to $40,000 a year contributed an average 6.7%, and those earning $60,000 to $80,000 contributed 7.3%; however, those earning more than $100,000, contributed less than 5%.

Two features of 401(k) plan designs also influence participant contributions, the study found. One is the availability of plan loans, and the other is the amount of employer contributions.

Contribution rates tended to be higher for 401(k) plans that permit loans to participants, a feature available to 84% of those in the study. Employees in plans offering loans contributed an average 0.6% more to their 401(k) plans than employees with no borrowing privileges.

However, despite the general availability of these loans, only 18% of the participants in the 1999 study actually had a loan outstanding. In addition, for those with loans outstanding, loan balances amounted to only 14% of total account balances.

About 91% of the 1.7 million participants in the study were in 401(k) plans that offer employer contributions. For employees in such plans, the average total contribution rate was 10% of salary including the employer contribution, as compared with 7.4% for those in plans in which the employer doesn't pitch in funds.

401(k): (2001)Nearly half of HR executives (47 percent) say they are unprepared to provide retirement planning advice to employees. In fact, HR executives say that educating their workforce about retirement benefits is their biggest challenge, and employees give them low marks -- the equivalent of a ``C'' -- for their efforts. Moreover, fewer than one-third of companies (30 percent) have taken action to promote awareness about enhanced retirement savings options available under pension reform legislation that takes effect in January.

Providing information and education to employees ranked highest on the list of challenges HR executives face as a plan sponsor. Forty percent of respondents said it was their biggest challenge, followed by the economic downturn (32 percent of respondents cited it as their biggest challenge), how/whether to offer financial advice (10 percent), using technology appropriately (5 percent) and implementing pension reform (5 percent).

While consumers gave their employers the equivalent of a "C" for education and information provided, HR executives, on average, graded their employee education programs a "B."

Only one in five people (22 percent) rely on their employer as their primary source of retirement-planning information. Plan providers and financial advisers also each garnered 22 percent, followed by family and friends (12 percent) and the media (5 percent).

Thirty-one percent of consumers said retirement plans are the most important employee benefit. Yet just 9 percent of HR executives cited employer-sponsored retirement plans as the most important tool for attracting and retaining employees.

The most-voiced complaints for Employer dissatisfaction with fund managers were poor plan administration, investment options, service, and poor communication/education.

Employers say they're unprepared to provide the retirement-planning information employees need to make informed decisions.

Well, they are not necessarily unprepared. They are too cheap. They can get sophomoric instruction for nothing from their vendors. They would never pay for me. And they also don't have a clue to what instruction should be. Pity- their EE's are telling them they want and need help and it will never get better.

Actually they are stupid- (2001) Invesmart Estimates That Three-Quarters Of Retirement Plan Sponsors Are Unaware of 'Hidden Fees' Invesmart, Inc., the national retirement services firm, estimates that approximately seventy-five percent of all retirement plan sponsors are unaware or unfamiliar with "hidden" costs and fees embedded in their plan. The components of ongoing fees for retirement plans include: recordkeeping / custodial fees, costs associated with an investment advisor and charges inherent in an investment vehicle such as a mutual fund expense ratio or an annuity charge.

Contribution Behavior of 401(k) Participants   (PDF) (2001)

The Investment Company Institute examined the 1999 contribution behavior of 1.7 million 401(k) plan participants. This sample of participants was drawn from data that the Employee Benefit Research Institute (EBRI) and the Investment Company Institute have collected as part of the EBRI/ICI Participant-Directed Retirement Plan Data Collection Project. Among other things, the ICI found that older participants contributed more to plans than younger participants, and that the overwhelming majority of the funds contributed to such plans were from pre-tax dollars.

401(k) PLANS: ARE EMPLOYERS & EMPLOYEES OUT OF STEP? (2001) According to Hewitt Associates, employers are trying to help correct employees' common 401(k) mistakes by enhancing their 401(k) plans. Unfortunately, recent research by Hewitt shows that these efforts may not be paying off as well as employers would like. The research is based on a comparison of two Hewitt studies, "2001 Trends and Experience in 401(k) Plans," which surveyed over 400 U.S. employers, and "2000 Hewitt Universe Benchmarks," which studied the investment behavior of more than 730,000 eligible employees and 500,000 active participants.

Lori Lucas, a defined contribution consultant at Hewitt, says that employers have made great strides in correctly identifying participation and diversification as issues that need to be   addressed, and are taking steps to do so. However, Lucas adds,   "it's also clear that employers may need to reexamine their efforts around improving contribution rates and increasing investment options."

For example, 45% of employers surveyed reported that increasing plan participation was the primary goal of their 401(k) education efforts. When asked to identify the most common employee investment mistake, 20% said it was the "failure to participate early enough." This seems to correlate with Hewitt's Benchmark research, which found that employees with tenures of two years or less participate in their employers' plans at a rate of 45.8% -- significantly lower than the average participation rate of 74%.

To address this problem, many employers are turning to targeted communications to newly-eligible workers and automatic enrollment.

The second most common employee investment mistake, said 24% of the surveyed employers, was identified as employees "not contributing enough." This is especially true of lower salary and younger employees, Hewitt research indicates. Lucas recommends that plan sponsors not only focus on getting out the message to "save more," but also on helping workers better manage their money so they can save more.

401(k): Investment Company Institute (Oct 2001 pdf) The Investment Company Institute examined the 1999 contribution behavior of 1.7 million 401(k) plan participants. This sample of participants was drawn from data that the Employee Benefit Research Institute (EBRI) and the Investment Company Institute have collected as part of the EBRI/ICI Participant-Directed Retirement Plan Data Collection Project. Among other things, the ICI found that older participants contributed more to plans than younger participants, and that the overwhelming majority of the funds contributed to such plans were from pre-tax dollars.

401(k): (WSJ 2002) Employers vehemently oppose any restrictions on the amount of their own stock in the employees' retirement accounts. They claim that limiting employer stock in an employee's account to 20% -- or imposing any limit -- wouldn't protect employees, but would take away their rights. (What a schmuck- there are laws and rules that take away "rights" every day. You can't kill, you can't go 100 mph on your neighborhood streets, you can't have a blood alcohol over 0.8 and drive.) People who invest in a company stock are overemotional and, generally, don't have a clue to proper investing.

There isn't any need for this change. "Where it makes sense, companies provide diversification." If companies don't provide diversification, they have a good reason. Companies are rational. They make decisions to build relationships with employees."  (What a SCHMUCK. I do not believe that a corporate officer or attorney in the United States knows truly what diversification is. Seem harsh? I have never met a securities attorney that knows either.)

Right and wrong: USA today had an article on the difficulties in 401(k) plans. Similar to the US News indicated below. But this is a generalized comment from a University of Alabama law professor who specializes in pension issues: "It's crazy to think that most Americans have a lot of investment savvy." That's an absolutely true statement.

But then he goes on to say-"We don't need everyone to be an expert. That's why we have investment professionals." This is wrong- primarily because so many theorists do not know the real world. You have to remember that the fundamentals of investing have NEVER been taught to brokers, supervisors, et al as part of licensing training. And I do not know of any continuing education courses that offer them either. I did try to teach the fundamentals in some courses for CFP's but it was a waste of time. For example, some brokers would come up to say that they understood diversification as I taught it but they could never apply it since they worked for a brokerage firm. Or some 25 year old said they knew how to pick stock. And the 45 to 55 year olds started talking about Cisco or whatever at break. Didn't make sense to continue to bother.

U.S. News and World Report had a article on 12/24, page 30, called "The 401(k) Stumbles". Obviously some salient points, but the journalists and literally every one of those interviewed got almost all the errors in the stock losses wrong. I replied,

"U.S. News and World Report

RE: 401(k) Stumbles, 12/24/01

I have watched with bemused interest the recent journalistic commentary from every "authority" about the lack of diversification in 401(k) plans and the huge losses sustained to a focus on singular stock. I am amazed at the lack of knowledge by employees and the clear breach of fiduciary duty by employers. But what is absolutely startling is that no consumer article has ever said what diversification actually is. Supposed experts, senators, 401(k) providers/advisory firms, publishers, employers, DOL, ERISA reps and the myriad of mouthpiece attorneys bandy on whether something is or is not diversified without ever providing the true statistical numbers that mean anything. Everybody rambles on about what is deceptive, or fair, adequate or inadequate, what risk is high or low, etc., but nobody universally has a clue to what they are talking about other than in banal generalities.

Before I provide the real life application, let me digress to give some of my background. (See also www.efmoody.com- the largest financial planning site on the Internet.) In short, I have taught all the courses for CFP education, insurance continuing education, securities courses, investments and much, much more with particular emphasis on the only course in securities application approved by the California State Bar, "Practical Investment Theory and Application". There is extensive info on diversification, aè7

This is what the issue actually is (I will not provide the cites or variations of the basics): Diversification is defined by, "how many stocks must you have in a portfolio in order to insulate it due to unsystematic risk. In a more colloquial tone, "how many stocks must you have in a portfolio in order to be properly diversified." It used to be around 10 to 15 (in the 1980's and before) in order to generally mirror the movement of a basic index (say S&P 500). If you only had one stock, the risk could easily exceed 50% of the risk of the index.. "Unfortunately ", because stocks have become far more correlated (definition at my site) over the last decade, a portfolio now needs at least 50 stocks to mirror the volatility of the market overall (say S&P 500) by¨7

The effort to curtail ER stock to 10% of a retirement plan does limit the exposure but does not reduce it to the acceptable level or risk. Whether ERISA, DOL or whatever, the˜7

The fundamentals is what I teach. But it's also the reason why companies refuse to hire me for investor education. Heaven forbid that the actual risk is identified- specifically for those companies effectively forcing employees to maintain a singular focus with some matching contribution. Further, spare me the comments that the employees retained a stock "voluntarily". Investors, no matter whom, represent a universal irrational and clearly emotional reliance on their (presumed) ability to gauge risk. And since the ER's refuse to„5

But when something goes wrong and the EEs, they still get the action wrong. It is not the fact that the management (supposedly) knew the company's stock was inappropriate for a retirement account. It is the fact that ANY singular stock is inappropriate. That is NOT semantics. It's a real life application of securities statistics. It is proven fact of the numbers that management has breached its fiduciary duty. A single stock reaches levels 100 or 200 times more risky that a simple index fund. Period. Anyone would have to be a total idiot to miss the undeniable risky position.

Pundits may state that "professionals" are clearly aware of the numbers to diversification. Nope. The fundamentals of investing have NEVER been taught to brokers or their supervisors (alpha, beta, correlation, diversification, asset allocation, suitability and more.) I know since I taught all such licensing cÈ7

Look at the people you quoted- they miss the point entirely. Dallas Salisbury says the restrictions on company stock would "fly in the face of the entire movement to individual retirement accounts." No it doesn't!! It flies in the face of a movement that has failed to warn consumers of the RISK. Fiduciaries have the duty to make sure the investment is suitable. It appears Mr. Salisbury does not understand diversification and hence has breached his duty by having little idea what he should be talking about. The use of a single security has a 100+ times greater risk than the market. Why is this so hard???

Then you get David Wray who says that "if you start with company stock, where does it stop? Do you outlaw sector funds?" I hope he doesn't do his own investing cause he's out to lunch. Sector funds do not have to be outlawed, but the investor sure has to be taught the limitations of their use. (You would probably be limited to no more than 20% in a portfolio- and that would consist of at least two different sectors.) It's called a basic pyramid of investing. You always cover the bottom part first before you can engage something with more risk. If properly informed, the investor/EE would have to sign off the risk if he/she wished to utilize something out of the proper context (probably also with spousal consent). This requires proper ER education to the EE. I doubt this will ever happen. Therefore certain restrictions need to be put in place limiting the totally unsophisticated and unknowledgeable employee from making a mess out of his/her retirement life.

It all involves some very basic fundamentals of investing- not just choosing 10% because it came out of a committee. Boxer, Corzine, et al can institute some limitations but I bet no one on their staff has a clue to the underlying implications. Even William Arnone doesn't get it. You don't need a top to bottom review of 401(k) plans. Teach the basics (find out if Ernst and Young know the numbers to diversification. Bet they don't) and make sure the basics are applied. There will still be risk- but at least ERs and EEs will know the limitations up front.

This really isn't hard. Diversification is easy to understand- so is the pyramid or investing, standard deviation and more- assuming you got people who know it to begin with. Admittedly however it all falls apart at that level since the fundamentals have never been taught to the fiduciaries (remember the basics have NEVER been taught to brokers, supervisors, most MBA's, etc.) Unless that is changed, restrictions are mandatory to stop naive employees (some stupid) from making mistakes that will impact the rest of their lives. But at least let's get the reasons properly defined."

There are still an awful lot of stupid people out there: (LA Times 2002) A November poll of 401(k) investors showed that they felt a 7% return on stocks for the next two years (doubtful, but possible). But 25% felt that stock prices would be from 30% to 100% PER YEAR during the next two decades. Median forecasts of 15% is WAY over the historical levels of about 10%.  

Advice: (2002) (Profit Sharing/401(k) Council of America) "Many companies do not offer investment advice to their employees about their retirement plans due to fear of lawsuits. After Enron, we would hope companies will at least start recommending diversification."

I am going to scream. I have preached this for years. If I had done just any simple classes to Enron employees, the losses sustained in retirement accounts would be no more than around 15%. But of course, Enron and all others won't hire me because I am required as a fiduciary to tell the truth. In retrospect, the truth would have been a lot better not only for the employees, but for the country. This never should have happened.

Prevalence of investment advice

22.0% of respondent companies reported providing investment advice. Advice was most prevalent in companies with 1-49 employees and least prevalent in companies with 200-999 employees. [See table 2.]

Reasons for not offering investment advice

The three most frequently cited reasons for not providing advice all pertain to fiduciary concerns, including:

Fiduciary concern about liability for advice that results in a loss, even if the advisor is competent and there is no conflict of interest (cited by 93.1% of respondents)

Fiduciary concerns about ability to select competent advice provider under ERISA "prudent man" standard (cited by 91.1% of respondents)

Fiduciary concern about ability to monitor advice provider under ERISA "prudent man" standard (cited by 90.2% of respondents)

401(k) (2002) The Profit Sharing/401(k) Council of America says of companies with company stock in their 401(k) plans, including matches and employee purchases, the amount of company stock breaks down approximately this way:

35 percent of the employees have less than 10 percent company stock in their plans.

48 percent have between 10 and 50 percent.

18 percent have more than 50 percent.

401(k) advice: (2002) A survey of 909 401(k) plans in December 2000 by the Profit Sharing/401(k) Council of America found that only 35 percent gave employees investment advice. More than half of them picked up the tab.

This figure is probably overgenerous. Forty-seven percent offered services only on the Internet, and of those providing individual advice, most were small companies, with 50 or fewer participants.

401(k): (2002) Financial advisers wishing to help employers benchmark their 401(k) plans should take note of a new Fidelity (www.fidelity.com) study that found 66% of 401(k) plan sponsors that provide matching contributions in company stock do not impose trading restrictions on their employees.

In fact, Fidelity finds that 15% of all plans with company stock removed trading restrictions last year and 21% are considering removing restrictions in the near future. The survey of more than 9,300 defined contribution plans appears to make a case for the benefits of company stock, most often offered as a match by the largest publicly traded corporations. Overall, company stock is available in 7% of plans with some 4.7 million participants, and 44% of employer matches are made in company stock.

Account balances in plans with company stock matches average $57,000, compared to an average of $40,000 in plans with no stock. Sponsors that provide stock as a match offer on average 25 investment choices, while plans with no company stock average 13 asset allocation choices.

Some of this misses the point. Simply taking off the restrictions in no way implies that the company has provided any insight to risk to the employees. Employers have really never offered good financial education. Even in view of the Enron debacle, I thought think they ever will.

According to a survey by InsightExpress (www.insightexpress.com 2002), 45% of employers are concerned about their 401(k) plans, to the point that one third of respondents say they would consider buying some sort of retirement insurance to protect them from "Enron-like" situations. Moreover, 40% say they would like their employers to reassure them somehow about the security of their funds, despite the fact that only 1% actually trust their employers to give sound financial guidance. ""Workers appear to expect a lot from their providers and financial advisers. Two-thirds want fund providers to be held responsible for their investment recommendations, while 59% would like them to quickly communicate any potential investment issues and risks and report suspicious practices to the government. Forty-three percent expect due diligence to be conducted on recommendations and 31% do not want the providers to be involved in any way with the investment opportunities they favor."

Lack of diversification: (2002) At one point, Enron employees as a group had 60% of their 401(k) assets in Enron stock, causing them to lose more than $1 billion as the share price fell from its peak above $90 in August 2000 to less than $1 when the company filed for bankruptcy last December.

“There are something like five million 401(k) plan participants that appear to hold more than 60% of their assets in company stock per a Wharton professor.

While most 401(k) plans do not offer company stock, the ones that do are generally very large. Overall, about 19% of 401(k) assets are tied up in company stock. Among the plans that offer this as an investment option, 29% of employees’ assets are invested in company stock. In the plans that allow employees free choice on the matter, 22% of assets are in company stock. But among plans where the employer makes the choice – generally by offering a matching contribution only through company stock – 53% of assets are tied up in company stock.

The study by Wharton noted, Typically, 401(k) participants are unaware of the heightened risks posed by company stock, Mitchell and Utkus found. A survey of Vanguard 401(k) customers showed they tended to view their own company stock as less risky than individual stocks in general.

And that is due to a predominantly poor effort nationally to educate the public.  It has not been done by educators and will NOT be done in teh future. Why? Because most of the instructors don't have a clue to the fundamentals.

In a Corporate Merger, What Happens to Your 401(k)  (mPower 2002)

Company Stock and Plan Diversification. Olivia S. Mitchell and Stephen P. Utkus

Default Effects and 401(k) Savings Behavior, James J. Choi, David Laibson, Brigitte Madrian, and Andrew Metrick 2002

401(k) safe harbor: Companies that achieve safe-harbor status are exempt from IRS discrimination rules. According to Automatic Data Processing Inc., a payroll processing and benefits administrator headquartered in Roseland, N.J., there are two ways for a company to reach safe harbor:

• A company must agree to make an annual contribution of 3% of an employee's salary to all workers who are eligible to participate in the plan (all contributions must be 100% vested); or

• A company must offer to provide a dollar-for-dollar match on the first 3%-of-pay contribution by an employee, and 50 cents on the dollar for the next 2% contributed (again, contributions are 100% vested).

The first option allows all workers, no matter how well paid, to participate equally in the retirement plan, while the second encourages lesser-paid employees to participate by offering additional savings if they max out on their employer's matching contributions.

The reason so few companies have adopted either of these two plans -- according to a recent survey by the Profit Sharing/401(k) Council of America in Chicago, only 4% of 900 companies surveyed use this plan-design option -- is the obvious concern about the cost of making additional plan contributions.

Some people are clueless: (2002) Despite the warnings of most advisers that participants limit company stock holdings to between 10% and 15% of their 401(k) portfolios, the 28% of investors who do own company stock say it constitutes 38% of their holdings -- more than any other type of investment in their plans. And, they continue, they do not want federal restrictions on the amount of company stock, currently a controversial point in the government debates on 401(k) reform.

401(k): The median 401(k) account at the end of 2000 was only $13,493, down from $15,241 in 1999 — meaning half are below that amount and half above.

Single 401(k) (2002) A business owner earning $100,000 could stash close to $31,000 in his or her retirement plan and take a tax deduction for the whole thing. On top of that, add the ability to borrow money from your own plan. It's not the best move in the world, but not the worst either, since you end up paying interest to yourself. There's no minimum required contribution, either, so if you have a tight-money year you can contribute less than the maximum -- or nothing at all.

401(k): (Hewitt Associates 2002) Last year, only 19.5% of 401(k) participants showed any trading activity compared with 30% in 2000. 29% had at least 75% of their portfolio in company stock while 15% had ALL their monies in corporate stock. For those over 60 years of age, 33% held 75% of their assets in company stock while 20% had all funds in their one company.

401(k) investing- A 2002 survey shows that while 401(k) participants do not want Congress to regulate how much company stock they can hold, they also are reluctant to take financial advice from their fund providers.

However, the participants also made clear that Internet-based advice would not get the job done. Only 19% say they would use it, and 6% say they would trust it outright. Instead, almost two-thirds of respondents say they prefer professional management, and that advisers should have both specific and general investing expertise and unbiased advice to offer.

401(k): (CFO Magazine) "That rumbling sound you hear in the distance is the growing chorus of very disgruntled employees who now realize that 401(k) account balances can shrink as well as grow--and who have discovered that they're not very good at managing them, anyway. The number of participants swelled from 7 million in 1983 to 42.1 million in 2000.

Because companies offered the 401(k), they diminished their defined benefit (guaranteed) programs . a 401(k) plan has the effect of reducing the total amount of money per employee that employers contribute annually anywhere from 14 percent to 22 percent.

The end result of the shift to 401(k) plans is that employees have considerably less money to retire on today than they had 20 years ago, according to research conducted by Edward N. Wolff, an economics professor at New York University, and the Economic Policy Institute, a Washington, D.C.-based think tank. A recent study by Wolff shows that retirement wealth (defined benefit and defined contribution benefits plus Social Security benefits) for the median (or most typical) household headed by a person aged 47 to 64 declined by 11 percent from 1983 to 1998--despite an increase in the Dow Jones Industrial Average of more than 730 percent. Only households in that age group with more than $1 million in preretirement income saw an increase in total retirement wealth.

In addition, the percentage of households approaching retirement that would be unable to replace half of their preretirement income rose from 29.9 percent in 1989 to 42.5 percent in 1998, according to Wolff.

John Hancock Financial Services found that 40 percent of respondents say they have little or no investment knowledge. Fifty percent say they don't have time to manage their investments. "Human nature may be the Achilles' heel of the 401(k) system," 

Really stupid people: (Institute of Management and Administration 2002 ) A dozen companies have more than 75% of their 401(k) assets invested in employer stock, according to an August survey of 318 plans.

At struggling AOL Time Warner, nearly half of 401(k) plan assets are invested in AOL stock. In the 12 months ended Aug. 1, AOL stock plunged 75% in value, hobbling many workers' retirement savings.

On average, plans surveyed by IOMA had 28% of their assets in company stock, unchanged from April.

Why do they do it (Hewitt) Investor inertia. Last year — a time of stock market volatility and controversy about company stock holdings — only 20% of workers made any shift in their 401(k) plan.

Poor understanding of risk. A portfolio invested entirely in the average Nasdaq-listed company is 31/2 times as risky as a well-diversified portfolio, a recent study by the Library of Congress' Congressional Research Service found. Yet, a third of participants age 60 or older had at least 75% of 401(k) assets in company stock, and nearly 20% had everything in company stock in 2001.

Restrictions on selling company stock. Workers are often prevented from selling company stock until they reach a certain age, often 50 or 55. In fact, 86% of nearly 300 companies in Hewitt's April survey said they have some restriction on diversifying out of the stock.

401(k) (NY Times 2002) Investors in 401(k)'s hold an average of 32 percent of their assets in company stock when it is offered as an employer match or employee investment option,

Just 22 percent of 141 companies surveyed by the Profit Sharing/401(k) Council of America, a nonprofit organization based in Chicago, said that they provided investment advice.

401(k): (Brightwork Partners and Search401k ) Financial advisers active in the 401(k) market say that the level of service they, and especially their clients, receive from 401(k) providers is the number one reason for selecting one 401(k) provider over another. Yet nearly one in three advisers (29%) gave the providers they use most a negative rating on customer management and account service issues. Only 23% of advisers gave their top providers excellent marks on this critical performance dimension. The balance (47%) described service quality as "pretty good."

40% of respondents rated their most-used providers negatively on the amount of investment advice provided to participants; 31% rated providers negatively for minimizing total investment costs; and 29% rated providers negatively when it comes to reducing plan costs for sponsors.

401(k)- (2002) If you left your firm and it went under with your 40i(k) money, call the US Pension and Welfare Benefits Administration at 866 275- 7922 and they will assign an adviser to track down your funds.

This is why I think some people are just plain stupid when it comes to money. According to a Merrill Lynch survey, more than half of all workers believe the federal government guarantees their 401(k) plans. And there is about the same number that believe that Medicare covers for long term care.

401(k) survey (LIMRA International and Cerulli Associates 2002)

• The average plan sold during the second quarter was $1 million. The average number of participants per plan was 62.

• The average account balance for sales during the second quarter of 2002 was $16,754.

• Of the sales in which the source was reported, 60 percent of the plans, 82 percent of the participants, and 95 percent of the assets were from takeover plans.

• Approximately $2.6 billion were reported as 401(k) assets lost during the second quarter. The annualized loss ratio was 6 percent for the quarter and 8 percent year-to-date.

401(k): (Amex 2003) According to the survey, based on responses from 495 participants in 401(k) plans, 25% of employees were invested in just one fund in 2002, up from 12% in 2000 and 14% in 1999. In addition, the percentage of participants who spread their contributions across two, three, or four funds dropped to 40% in 2002, from 60% in 2000. 

Max 401(k)  (2003) David Wray, president of the Profit Sharing/401(k) Council of America cites a 2001 PSCA survey finding that 401(k) plan participants contribute an average of just $3,514 annually[That's less than $300/month.]— far short of the $11,000 current annual limit.

Ted Benna, creator of the first 401(k) plan and president of the 401(k) Association in Bellefonte, Pennsylvania, ventures that as few as one in 20 participants are currently capped by the maximum contribution limits.

401(k)'s: (USA Today 2003) Participation has dropped 2.5% in the last year to 75% overall. Workers savings rates fell 156% from 8.6% to a current 7%. The average plan offers 16 choices- up from 14 a year ago. Plans with more than 500 million offer an average of 31 choices

401(K) (2003) Forbes notes that  lawyers have field 115 suits against 35 companies regarding poor 401(k) plans. And another 22 more are in the works.  The DOL has put its two cents in saying that fiduciaries are responsible for failing to adequately monitor plans.  At the end of 2000, 19% of all 401(k) assets were in company stock. Supposedly under ERISA, the burden of proof is less than under securities laws.

I doubt you have an attorney, anyone at the DOL or anyone involved with ERISA who knows what diversification is. And if you do not know that, you have violated your fiduciary obligation.

401(k) IRS private letter ruling (2003):  Normally, when someone dies, they have to take the money out of the employees account and are then subject to huge ordinary income taxes.

The ruling for the first time enables a taxpayer to circumvent full distribution -- required by many plans for any beneficiary who isn't a spouse -- by using an annuity to spread payments over a beneficiary's lifetime. The annuity mimics distribution rules currently allowed for traditional individual retirement accounts, but not for 401(k)s or for Keoghs, a type of retirement plan for the self-employed or small-business owners.

401(k) (2003) Under the law, workers 50 and older can make an additional contribution of $1,000 to 401(k) plans this year. Other workers are restricted to a maximum annual contribution of $11,000.

The amount of the catch-up provision for older workers increases every year until it reaches $5,000 in 2006. But the catch-up benefit is not mandatory. And many companies have not added it. Only 37% of the 977 401(k) plans that T. Rowe Price administers offer older workers a chance to make catch-up contributions. Among Vanguard Group's 1,500 plans, 61% offer it.

401(K):  (2003) A survey by Mutual of Omaha in consultation with the Profit Sharing/401(k) Council of America (PSCA)showed 401(k) participants are spending less time reviewing their plan performance and options than they were two years ago.

A total of 81 percent of those surveyed spent less than 10 hours per year reviewing their 401(k) plan and 9 percent said they spent no time reviewing their plan. That's a significant increase from the 3 percent who said they spent no time with their plans and 75 percent who spent less than 10 hours when the same survey was conducted two years ago.

This lack of engagement with their 401(k) plan is reflected by responses to a question regarding the number of investment funds available in their plan. A total of 15 percent said they had "no idea," more than double the 7 percent who did not know in the 2000 survey. A dip in investor confidence caused by the bear market could explain the reduced attention to 401(k)s. Of those surveyed, 59 percent said they were very or somewhat knowledgeable about investing, down from 66 percent two years ago. In both years, the percentage of respondents who viewed themselves as very knowledgeable was only 15 percent.

Two trends in the 401(k) market over the past few years have been the proliferation of fund choices within plans and efforts to educate plan participants. The survey revealed there may be a growing number of plan participants who now feel that they are offered too many choices. Of those surveyed, 8 percent said the number of funds offered was "a lot more than needed," compared with 4 percent in the 2000 survey. The trend toward "hands-off investing" argues for expanded use of asset allocation and lifestyle-type funds, Bauer said. The most recent survey indicates that many plan participants would at least consider taking advantage of such plans. Of those surveyed, 52 percent said they believe that their plans offer asset allocation models, and 34 percent said they take advantage of those models. Of those who do not have asset allocation models available, 32 percent said they either probably or definitely would use a model, and another 36 percent said they would consider using one.

401(k):  (2003) Shrinking 401(k) balances have not prompted Americans to spend more time on financial planning for retirement, according to a survey by Mutual of Omaha. In fact, 401(k) participants are spending less time reviewing their plan performance and options than they were two years ago...probably because it makes them sick.

Buying stocks in a 401(k): (NY Times 2003) Until recently, brokerage accounts in retirement plans have been limited to small companies. By last year, 11 percent of large companies — those with 5,000 or more employees — included brokerage accounts in their 401(k)'s, according to a survey by the council. That compares with 5 percent in 1997. Self-directed accounts are expected to be offered in nearly one-third of all retirement plans by 2006.

One impediment to the rapid rollout of 401(k) brokerage accounts is fear of corporate liability. Federal regulations protect 401(k) sponsors from liability for losses incurred by participants who make their own investment decisions, but the sponsor is responsible for selecting and monitoring investment managers and investment options.

Just 6 percent of eligible 401(k) participants nationwide have actually opened individual accounts at companies that offer them."

Anybody buying stocks in a 401(k) is almost universally a moron. O.K., that's harsh. Stupid is fine.

401(k) Plan Asset Allocation, Account Balances, and Loan Activity in 2001

401(k) Rollovers- In 2001, 401(k) rollover assets were $105 billion, and they are estimated to grow to $369 billion in 2011

401(k): (2003) According to the Profit Sharing/401(k) Council of America, an estimated 42 million 401(k) investors had total assets of $1.6 trillion in 2001.) On the whole, corporate 401(k) contributions have been falling in recent years as profit margins tightened and the labor market loosened. According to the Profit Sharing/401(k) Council of America, the average matching payment fell from 3.3 percent of salary in 1999 to 2.5 percent in 2001.

Maxing a 401(k) A comprehensive study of 401(k) accounts by the Employee Benefit Research Institute has found that only 11 percent of participants actually save the maximum permitted. But 47% thought they were.

As far as education- Seventy-six percent of the respondents trusted their employer to manage their accounts, but 41 percent gave their employers a grade of C or worse on "the quality of education and communication they provide." Only 19 percent gave a grade of A, while 37 percent gave a B.

401(k) (2003) Buck Consultants survey cites an alarming number: based on 2001 company data, participation rates in 401(k) plans were down to 73% -- the lowest number since 1991. Employees are apparently fed up with their 401(k) performance, while experts fault the lack of education and advice.

401(k): (WSJ 2003) At least a dozen major employers have cut or suspended contributions to their 401(k)s since the start of last year. As many as 25% of people with 401(k) plans that allow loans have raided them for extra cash.

* A 401(k) works well for the "15% to the 20% of the population that has the know-how and desire" to take control of their retirement savings. But they don't work well for the majority of the population."

Brigitte Madrian, an associate professor of economics at the University of Chicago's Graduate School of Business.

Vanguard Group, a 401(k) provider, says about 5% of its 1,500 corporate clients have eliminated or reduced their matching contributions. When New York Life Investment Management surveyed eight of its clients that had dropped or cut matches, it found that participation rates had declined by an average of 9.45%.

Fewer workers are signing up. Just 73% of workers participated in their company's 401(k) retirement-savings plan last year, the lowest level since at least the early 1990s.

 When employees change jobs, 23% of them withdraw the money instead of rolling it over into a new retirement account.

Vanguard says that 17% of people who enrolled in its 401(k) plans last year are putting no money into stock funds.

Education: (Gary W. Selnow, a professor at San Francisco State University 2003)  Educating employees about retirement issues may help. But although many companies have instituted some form of financial education, he quotes from a study that found 70% of American workers “have not even calculated their financial needs for retirement, half have made negligible contributions to their retirement funds, and fully 15% have saved nothing for their later years.”

401(k) (Wharton 2003) Despite the fact that average 401(k) plan offerings increased available options by 20.5% from 1998 to 2001, according to Vanguard Pension Research Council, only about 75%-80% of eligible workers participate in them, according to the Profit-Sharing/401(k) Council of America.

Data indicate that the participation rate is even lower among younger and low-income workers. Further, although financial advisors suggest a contribution rate of 10% or more of pre-tax salary, the average 401(k) participant contributes less than seven percent, according to the Employee Benefit Research Institute.

And very interesting- Iyengar and her colleagues tested the theory by examining 401(k) participation rates among nearly 793,000 employees of 647 Vanguard plans in 69 industries, and found that more funds offered by the plans led to fewer employee participation rates. “At two extreme ends, when there are two funds offered, participation rates are at a peak of 75%,” says Iyengar. “When there are 60 funds, participation rates are at a low of approximately 60%.”

She concludes that “there is a distinctive trend suggesting that the decline in participation rates is exacerbated as offerings increase further.”

401(k): (2003) The average 401(k) balance was just $45,634 at the end of last year, according to a study by the Vanguard Group

401(k) diversification- (2003) While the average 401(k) plan offered 13 fund choices in 2002, participants on average held only 3.6 funds.

nearly 40 percent of the employees held only one or two asset classes in their 401(k) plan, primarily company stock, guaranteed investment contracts or stable value funds, or large-company focused U.S. stock funds.

The average 401(k) participant holding company stock had about 42 percent in his or her employer's shares in 2002.

the average 401(k) balance at year-end 2002 was about $49,000, down about 2.5 percent from year-end 2001

Rebalancing: A study published in June by Hewitt Associates Inc., a Lincolnshire, Ill., consulting firm, found that only 17%, or 1 in 6, of active 401(k) participants made trades in 2002 in any of the investments in their accounts, which might include mutual funds, stocks and bonds. Put another way, about 83% of account holders failed to rebalance their 401(k)s last year.

401(k) BY THE NUMBERS (2003)

• Average percentage of pay contributed to 401(k) plans: 7.8

• Percentage of surveyed workers in 2003 who have tried to calculate how much money they will need to save for retirement: 37

• Average number of funds available to choose from in employers' 401(k) plans, and average number of funds actually held by plan participants: 13 and 3.6

• Percentage of 401(k) balance held in company stock among average plan participants holding company stock: 42

• Percentage of 401(k) participants who made trades of any kind in their accounts during the year: 17

• Age and tenure, in years, and annual salary, in dollars, of average 401(k) participant: 43, 10 and 57,000

• Percentage of surveyed workers -- in 2002 and 2003, respectively -- who say they plan to retire at age 66 or later: 18 and 24

• Percentage of 401(k) assets held in equity investments by the average plan participant: 66

• Percentage of surveyed workers who say they haven't saved for retirement: 29

• Average percentage of workers who participate in their employer's 401(k) plan: 68

• Percentage of surveyed workers who couldn't identify, or who incorrectly identified, the age at which they become eligible for full retirement benefits from Social Security: 84

• Average total balance, in dollars, in 401(k) plans: 49,000

Note: All figures are for 2002, unless otherwise specified.

Sources: Federal Reserve; Hewitt Associates; Employee Benefit Research Institute

401(k): (2003) the average 401(k) account lost only 7.9 percent of its value in 2002, even though the average stock fell by 22 percent.

Why such a small loss? Most accounts are so small that new contributions made up for the falling values of older investments. Among the 15.5 million accounts studied, the average balance at the end of 2002 was a too-small $39,885.

About 16 percent of investors' assets were in their companies stock.

More 401(k) The Profit Sharing/401k Council of America found that 51.9 percent1 of company respondents provide investment advice. Of those that don't, the three most frequently cited reasons that potentially deter employers from making advice available were:

Fiduciary concern about liability for advice that results in a loss, even if the advisor is competent and there is no conflict of interest (cited by 93.1% of respondents)2

Fiduciary concerns about ability to select competent advice provider under ERISA "prudent man" standard (cited by 91.1% of respondents)2

Fiduciary concern about ability to monitor advice provider under ERISA "prudent man" standard (cited by 90.2% of respondents)2

U.S. Labor Department's Leslie Kramerich in a major address before the American Society of Pension Actuaries Conference in Los Angeles. She outlined several salient points answering specific concerns voiced by the plan community about investment advice including the following:

Many employees need investment advice. Many employees are not schooled in complexities of investment management, risk/return strategies, asset allocation and diversification principles yet often have the responsibility for making investment decisions in their 401k plans.

Investment education is an important tool. When the Department of Labor issued Interpretive Bulletin 96-1, it distinguished a variety of investment-related investment education activities from the fiduciary act of providing investment advice, and made clear that designating a person to provide investment advice to participants would not, in and of itself, give rise to liability for losses resulting from the individual participant's investment decisions.

Investment education may not be enough for some employees. Many employees may not wish to assume responsibility for making such decisions and may need professional advice. A plan may pay reasonable expenses in providing such investment advice to the plan's participants.

Employers are not liable for acts of investment advisors. IB 96-1 indicated that in ERISA Section 404(c) plans, the person designated to provide investment advice would not be liable for loss that is directly the result of the participant's exercise of control. As with any selection of a service provider, however, the plan fiduciary is still responsible for the prudent selection and periodic monitoring of the designated advisor.

Prudent selection of an investment advisor limits the employer's liability. The rules applying to the prudent selection of one or more investment advisors for plan participants are similar to those applying to selecting any plan service provider. Responsible plan fiduciaries must engage in an objective process to elicit information necessary to assess the provider's qualifications, quality of services offered and reasonableness of fees charged for the service. The process also should be designed to avoid self dealing, conflicts of interest or other improper influence.

Too much choice is not always a good thing—at least for 401(k) investment options.  (2003) Offering employees lots of investment choices in a 401(k) plan actually leads to lower participation. The research finds that, on average, every additional 10 investment choices cuts participation rates by 2%.

401(k): (Hewitt 2003) Nearly half of all workers who changed jobs last year voluntarily cashed out the savings in their 401(k) retirement plans instead of rolling over their assets into their new employers' plans or individual retirement accounts.

cashing out of a 401(k) deprives workers of years of compounding, which can turn even small sums into a tidy nest egg. Not only will you be hit with a 10% penalty if you take out the money before age 59½, but you'll also be socked with ordinary income taxes.

The highest incidence of cash distributions occurred among younger employees, with 50% of those age 20-29 taking the money. But the number was high for older people as well. More than one-third of employees 60 and older took their distributions in cash, as did 33% of employees 50 to 59.

What was surprising about the survey, which covered 160,000 employees who took 401(k) distributions last year, was the level of cash-outs for older employees and those with large balances, said Stacy Schaus, a Hewitt consultant. About 87% of workers with $5,000 or less in their accounts took a cash distribution, as did nearly three-quarters of those with balances of $5,000 to $10,000. But the survey also found that 20% of workers with balances between $40,000 and $50,000 and even 6% of those with $100,000 balances and higher opted for a cash distribution.

401(k)s and the Mutual Fund scandal: A survey by Plan Sponsor magazine showed that more than 16 percent of respondents had already dropped a fund or a fund management company from their plan, and nearly 13 percent said that they were at least considering that step.

401(k) Plans: (2004) Between 1998 and 2003, 401(k) eligibility periods of three months or less increased to 51% from 32%, according to new data from the Profit Sharing/401(k) Council of America. Of the 200 firms polled offering both 401(k) and profit-sharing plans, the PSCA found that 16% have immediate eligibility for both plans, 10% have immediate 401(k) eligibility and a one-year profit sharing eligibility, 12% make workers wait six months in both cases, and 29% have a year-long eligibility period in both instances. Nearly two-thirds (65%) use the same rules for both programs.

A new survey by the Profit Sharing/401(k) Council of America (PSCA) reports that more than half (51%) of companies surveyed allowed new employees to join their 401(k) program during their first 90 days with the company, while 37.2% allow for immediate 401(k) eligibility. That’s the good news. Nearly 29% - and more than 40% of companies with 100-500 workers – still make people wait a year..

Poor advice: (2004) An  investment education provider just completed a survey of plan sponsors for one of their TPA clients and found that just 11.9% were satisfied with their current education programs, and little wonder. Indeed, a recent online participant survey reveals that more than half (51%) of some 1,120 participant respondents said they didn’t even know how much they were contributing from their paychecks ito their 401K plans.

401(k): When workers leave jobs, a recent Hewitt study found that nearly half (42%) of workers cash out their 401(k)s instead of rolling the assets into an IRA or their new employer’s retirement plan. The statistics show that more than half (57%) of workers with 401(k) balances between $5,000 and $10,000 cashed out, while 46% with balances between $10,001 and $25,000 cashed out. However, a even a relatively modest 401(k) balance of $5,000 that earned an average annual return of 8% could more than triple in size in 15 years and grow to $50,313 in 30 years – and that’s ignoring the impact of taxes and employer matching contributions..

The results of Deloitte’s 2003 Annual 401(k) Benchmarking survey suggest that plan sponsors are more actively poring over their plans’ investment performance and turning a more skeptical eye toward plan fees. The survey reports that the number of plan sponsors benchmarking how well their investments did on a quarterly basis jumped to 55% in the latest poll, up from 47% last year – while only 83% labeled their plan fees “competitive,” versus 87% a year ago, according to Deloitte’s 2003 Annual 401(k) Benchmarking Survey. Still, nearly all (96%) employers believe participants are satisfied with their plan investment options – up (slightly) from the 93% that said so a year ago.

LTC: (2004) A national study of Medicaid funding for long-term care services released today shows that on average, the Ohio Medi