A new call for in-house help on 401(k)s

You might think working for a financial-services company would give you an edge in making investment decisions. But a study of five such firms found employees chose 401(k) options that consistently underperformed the market.

The study, by the National Center for Policy Analysis, found that from 1995 through 1998, none of the plans had returns matching a sample mix of 60 percent stocks and 40 percent bonds culled from major indexes. Such a portfolio would have earned an annual return of 21 percent. Returns at the financial-services firms: Morningstar, 13.1 percent; Prudential, 10.5 percent; Hewitt Associates, 12.6 percent; Citigroup, 17.8 percent; and Merrill Lynch, 11.0 percent.

One reason for the poor performance of 401(k) plans at such firms - and, the study maintains, in general - is that lower-level employees often don't know how best to invest their funds. They often go the fixed-income route, bypassing the potential earnings that come with increased risk.

Often, more savvy employees are discouraged from giving such workers advice, according to the study. How to remedy the problem? The study proposes automatically enrolling employees in 401(k)s unless they opt out, giving them the opportunity of having funds managed by investment professionals, and requiring plan sponsors to cover all fees and expenses.