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The push to reform 401(k) plans

401(k) reformIf your company provides a 401(k) retirement plan, it's likely that regulations will soon be imposed to help protect your investment.

Congress and lobbying groups on both sides of the fence are debating new laws aimed at preventing another Enron situation where thousands of employees watched their retirement money all but evaporate under allegations of corporate fraud.

Fraud isn't the only enemy. 401(k)s are very lightly regulated, and many employees are finding out the hard way that they don't have total control over their retirement investments. And what control they do have comes with a high degree of risk.

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401(k) vs. traditional pension
For millions of American workers, 401(k) plans have replaced traditional pension plans. 401(k)s -- defined contribution plans -- offer employees a large degree of choice when it comes to investments and control over when to buy or sell most of those investments.

Traditional pension plans -- also known as defined benefit plans -- usually give employees no choice or control. But the federal government heavily regulates traditional pension plans. If a company goes bankrupt, the Pension Benefit Guaranty Corp., a federal agency, will pay workers the minimum benefit promised by the pension plan.

401(k) plans have none of that protection. Workers can sue if they think the company breached its fiduciary responsibility for the plan. But even if they win, they may not get any money if there's a bankruptcy.

Traditional pension plans are prohibited from having more than 10 percent of the plan invested in company assets -- stock or real estate. 401(k)s don't have that limit, and the result is many employees are too heavily invested in their company's stock.

When the market goes through a downturn and the company stock nosedives, employees can see the value of their retirement fund cut in half or worse.

The problem can be compounded by the fact that many companies contribute their match in the form of company stock. Companies are allowed to control the sale of the matching contribution and often force employees to wait until age 55 to sell the matching stock.

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Congress is examining proposals that would limit to 10 percent or 20 percent the amount of company stock in 401(k)s if the employer's match is company stock. There may also be additional tax incentives for employers to make the match in cash instead of stock.

Some legislators want to put a 90-day limit on the amount of time an employee can be forced to hold matching company stock before selling it.

Congress is also looking at "lockdown" or "lockout" periods. During a lockout period, employees are prohibited from trading in their plan.

Companies traditionally lock down 401(k)s when the company is about to change plan administrators to give the new administrators time to reconcile the books, etc. Most companies give advance notice of a month or two when a lockdown is about to occur. There are no rules limiting the length of lockdown periods.

If an employer announces bad news during a lockdown, the company stock can plummet. Employees, temporarily prevented from accessing their account, can only watch as their retirement money shrinks.

The reform debate
Consumer advocates say broad reform is needed.

"We need to be sure people can be made whole," says Karen Friedman of the Washington, D.C.-based Pension Rights Center. "There is no law that fiduciaries have to have insurance. They could do something improper, you could sue and win, but there's no money to be had.

"Also, the most you can hope for is just getting your money back, there are no provisions for damages under the law. There are often conflicts of interest. The person who runs the plan can be a company official. We think Congress should look at independent fiduciaries running these plans," Friedman says.

David Wray, president of Profit Sharing/401(k) Council of America, a lobbying group that represents employer plans, says everybody should slow down before loading 401(k)s with a lot of regulations.

"Let's get all the facts before we rush to change things. They want caps and diversification. What about the person who is retired and has all their money in one stock? This is an issue more about employee education."

Wray says he sees no evidence suggesting there's a need to regulate lockdown periods.

"The lockout is an administrative process that doesn't have much to do with the company. Changing record keepers is in the benefit of the employees."

President Bush has ordered the departments of Labor, Treasury and Commerce to form a task force to review retirement plans regulations and see what, if any, changes are needed.

Ted Benna, the man widely known as the father of the 401(k) for creating the first plan, says there is plenty of room for improvement.

"We need to get away from employers forcing employees to liquidate their investments and move from one set of funds to another when there's a merger or a change of providers.

"This is counter to the whole concept conveyed to participants that the 401(k) is your responsibility -- you decide how to invest your money. All of a sudden they get notice that their investments will be liquidated. They find they don't have as much control as they thought. There's a significant disconnect in perception vs. reality," Benna says.

Benna says this also brings up the issue of fiduciary responsibility. The ultimate fiduciary responsibility is to act solely in the best interest of the participant. Decisions to force employees to liquidate investments and move money to a new set of funds are very likely violating that standard, according to Benna.

"What drives that decision is administrative simplicity. The acquiring company calls its provider, and the provider says, 'Liquidate the investments they have, and have them move into our plan.' It has nothing to do with what's in the best interest of the participant."

What else does Benna think is wrong with the 401(k)?

He believes expenses charged to participants are higher than they should be and that employers shouldn't be deciding what investments are offered in the plan.

"They're no better at picking investments than are the participants," Benna says.

Benna says he's in favor of prohibiting employees from putting their own money into company stock when stock is the employer's matching contribution -- but he doesn't think employers should be restricted.

"We shouldn't make changes about stock given to employees. If companies can't contribute stock to the plan there's real potential many will reduce or eliminate their contributions. You're better off getting a 50 percent match in company stock than no stock at all."

As for the proposed 90-day limit on barring employees from selling that matching stock, Benna says that's not realistic.

"But somewhere between 90 days and age 55 -- I think there's room for compromise. Essentially, we now have some 20 years of 401(k) experience to look at -- we need to see how we can make these programs better for participants."

-- Posted: Jan. 29, 2002

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See Also
Frequently asked questions about 401(k)s
Retiring early on a 401(k) or IRA without penalty
More savings stories



 
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