The 401(k) needs to eat its Wheaties. With the health of Social Security in question and the defined-benefit pension plan fading fast, today's 401(k) plans are shouldering more of America's retirement burden than they were ever designed to bear.
Problem is, the difference between a good 401(k) plan and a bad one could mean the difference between living the good life in retirement and never retiring at all. High fees, poor investment choices and the absence of company matching money can shave years off of your nest egg.
Figuring out if your plan is a weakling or a winner is notoriously difficult. But a San Diego company called BrightScope has created an independent retirement plan rating system to assess the health of 401(k) plans nationwide.
Mike Alfred, co-founder and CEO of BrightScope, said industries with well-educated, higher-paid employees with more money to save and companies that earn higher profits tend to have higher ratings. Industries that tend to have shorter-term, low-paid workers (retail for example) struggle to persuade workers to contribute. Target Corp.'s BrightScore rating is 58. Best Buy's is 55.
"They're certainly doing a very good job for a retailer, but there are other retailers like Costco that are doing significantly better," Alfred said of the warehouse club's 63 rating.
Alfred, a former investment manager, created the 1-to-100 scale BrightScope rating with his brother and an engineer using data from the Department of Labor. The rating plops an average worker -- a 44-year-old with about $40,000 saved -- into a company's retirement plan and runs thousands of simulations using different scenarios about market performance to see how long it would take that worker to replace 75 percent of his or her pre-retirement income. The company plan that gets the worker there fastest wins.
Plans that came out on top have many similarities. Upward of 75 percent of the employees working at these companies participate in their workplace plan. Top plans also tend to emphasize low costs and offer a large variety of investment choices that have performed well over a five-year period. And they all contribute company money to employees' retirement coffers, something hundreds of employers eliminated during the recession and are only slowly beginning to restore.
The best plans rarely have high fees.
Fees by their very nature reduce returns, so higher ones prevent you from getting to retirement fast, Alfred explained. "If you have higher fees, not only are you seeing a return reduction, you also probably have a culture at your company that doesn't care as much about providing the best plan for you," he said.
The good news is that the Department of Labor finally released guidelines requiring 401(k) service providers to disclose how much they make in fees and whether they have conflicts of interest. This goes into effect July 2011.
Then there's company culture, something the quantitative BrightScope rating doesn't measure but is important just the same. Companies that believe it is their duty to provide a strong financial foundation for employees tend to have more success persuading workers not only to participate, but to contribute more.
Anyone can check out the health of their employer plan for free at www.brightscope.com. Keep in mind that because BrightScope relies on government data, some could be almost two years old, meaning any recent changes to your plan won't be reflected in the rating.
Stuck in a low-rated plan? If your plan's expenses are high, your choices stink and your company doesn't contribute matching money to your account, you may want to consider saving in a retirement plan you control -- an IRA or Roth IRA with lower fees and good investment choices. If your company does offer a match, invest as much as you must to get that free money, then explore outside options.
If the 401(k) is still your best bet, Alfred suggests analyzing the funds you chose within your workplace plan to see if you can shave basis points off of your fees by selecting different funds.
Armed with this data, I'd go to your benefits administrator to discuss the way to a better 401(k)
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