Sure you're secure? How to spot flaws in a...401K

Between 30 million and 40 million workers sleep well at night, knowing that regardless of how well the US Social Security system holds up, there is always a fallback position: the money in their good ol' contributory retirement plans.

Indeed, 401(k) and 403(b) plans have become the bedrocks of the American retirement system. An employee's regular contributions to these plans - often boosted by matching grants from an employer - can provide monetary reassurance for one's twilight years.

Moreover, since most 401(k)/403(b) participants are buy-and-hold investors, they help shore up the US economy. In April, for example, participants tended to make normal contributions to their plans even as the stock market tumbled, according to Hewitt Associates, a consulting-benefits firm.

But unfortunately, many workers' dreams of happy retirement have grown cloudy of late, buffeted by a combination of low returns from shoddy investment choices, inordinately high expenses - and in some extreme cases, mismanagement or malfeasance.

The evidence is overwhelming: Few workers ever bother to check up on the management, safety, and performance of their plans.

Guess what? It's time to do so.

In recent years, most 401(k)/403(b) retirement plans have posted solid gains, reflecting the underlying strength in the US economy and the soaring stock market. But not every company plan has been a success story. Among the problems:

Poor choices. At many firms, the menu of investment products is limited. Often firms offer a choice of only a few mutual funds, a fund based on company stock, or a guaranteed-investment contract (GIC), which pays a preset rate of interest.

An ideal menu should let you tap into a number of mutual-fund families, a GIC, and company stock. "The average menu includes about 11 choices," says Michael McCarthy, a 401(k) consultant with Hewitt Associates. But more than 60 percent of all companies don't offer that many, he adds.

An ideal plan, says Mr. McCarthy, should let you buy individual stocks and bonds through a brokerage house, and provide access to financial planners - often through the Internet.

High expenses. Few employees bother to find out how much their fund administrator charges or how fees are assessed. Experts say fees should generally not be more than 3 percent of assets, if not lower.

Cutting-edge firms seek to lower participants' costs by putting 401(k)/403(b) assets into "institutional" funds rather than commercial mutual funds offered to the public. Institutional funds have substantially lower costs because of their large asset base. Still, says McCarthy, the good news is that, by and large, "administrative costs have been coming down" in recent years.

Limited access. Not all workers can participate in a plan. While some 96 percent of large companies offer them, small firms tend not to have them. Only about one-third of firms employing 100 to 500 workers do, according to Spectrem Group, a research-consulting firm in New York. Only about 13 percent of firms with 100 or fewer employees offer them.

Even those firms with retirement plans sometimes make new employees wait as long as one year before letting them join. Long delays can also occur when a firm is taken over by another firm and a plan is switched to the new employer's plan.

"We've been waiting now for months to hear about our 401(k) options," says Chris Hall, an employee of an electronics firm outside Newark, N.J. His firm was taken over in an acquisition. "We can't contribute to the old firm's plan. And we have no idea when we can start contributing to the new plan."

Inadequate match. One should, of course, be grateful for any voluntary match from an employer. But some firms are far more generous than others.

"The typical match is between 50 cents and $1 on the dollar for the first 6 percent of salary," says Jeff Close, director of marketing for Spectrem Group. At some firms, however, the match is far less, or, in severe situations, nonexistent.

Mismanagement or malfeasance. During the past five years, 4,853 investigations have been conducted into alleged mismanagement of 401(k) plans, according to the US Department of Labor. As a result, $84.1 million in delayed or lost 401(k) contributions have been recovered through March 31, a department spokeswoman says.

While the amount is just a tiny fraction of the $1.5 trillion said to be in 401(k) plans, it sends a message that participants need to be alert, especially when companies are in the midst of reorganizing.

In two recent cases, for example, employees claim they have lost money out of negligence - or worse.

In one case, some 45,000 workers at Pacific Telesis complained that their retirement money was mismanaged after the company was merged into SBC Communications, a prominent "Baby Bell."

Before the merger, the workers owned stock in AirTouch communications. The AirTouch stock was sold after the merger and the money was reinvested into different investment choices - options that produced little while AirTouch stock soared.

A number of employees are now bringing a class-action suit against SBC for dumping the AirTouch stock.

SBC, for its part, insists that it did not profit from the conversion of the AirTouch stock.

In another class-action suit, a group of disgruntled employees are suing First Union Corp. a large bank in the Eastern US. Among other issues, the suit alleges that First Union, which administers the bank's 401(k) plan, charges higher fees than if the firm used an outside administrator. The bank, which offers only its mutual funds to its plan-holders, denies any wrongdoing.

Sometimes employers listen when workers challenge forced sales of portfolios. Last month, Rockwell, an electronics company with extensive holdings in Orange County, Calif., backed off from a plan that would require employees to shed non-Rockwell stock from their 401(k) plans after workers complained.

"The whole [retirement] system is now so big, the rules are so arcane and complex, and merger activity has become so common, that there will be lawsuits now and then about individual plans," says David Wray, president of the Profit Sharing/401(k) Council of America, a trade group in Chicago.

He adds that another class-action suit may now be on the way involving New York Life, an insurance firm.

Forcing company stock. Many 401(k)/403(b) plans are built around the company's own stock - rather than offering major alternative investments. At Coca-Cola, for example, more than 80 percent of the firm's plan is invested in company stock.

Moreover, some companies attempt to match contributions with company stock - which can be a mixed blessing. If the firm does well, participants will likely reap benefits. But if the firm loses ground, is taken over by another firm, or goes under, trouble can follow.

(c) Copyright 2000. The Christian Science Publishing Society