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Firms Upgrade Retirement Plans Amid Clamor for Greater Choice

By: Jeff D. Opdyke
Wall Street Journal, July 25, 2002

To protect themselves from the gyrations of the stock market, investors these days are being advised to move into a range of alternatives, from real-estate to special bonds with built-in protection against inflation. The only problem: Many retirement plans prevent people from doing so.

Now, a small but increasing number of companies, including Verizon Communications Inc. and Ford Motor Co., are overhauling their 401(k) plans in an attempt to make sure their workers have adequate nest eggs when they retire. The new choices are designed to give workers broader access to the investments used by big institutional investors. In other cases, it is to vastly simplify the bewildering array of choices that overwhelm many employees.

The changes have enormous consequences for the way Americans direct their retirement savings. About 42 million workers contribute part of their paycheck into 401(k) accounts, investing about $12 billion in new funds each month. The efforts highlight an underlying flaw in many 401(k) plans that has gained more attention amid the market downturn: Investment menus often do a poor job of allowing workers to adequately diversify their accounts.

Verizon unveiled a 401(k) plan in January that added real-estate investment trusts, or REITs, and Treasury Inflation Protected Securities (TIPS), two investments that are increasingly popular right now. TIPS are a type of bond whose principal adjusts with inflation each year. Verizon says it made the changes to better mimic the mix of investments in its separate pension plan, which is managed by professionals.

Ibbotson Associates, a Chicago investment-consulting firm, added a REIT to its 401(k) this month after analyzing the beneficial impact that real estate can have on investment portfolios. The company noted that the addition of real estate lowers a portfolio's risk over time, ultimately helping to improve returns. International Business Machines Corp. is also weighing adding a REIT to its plan. All told, about 9% of companies with 401(k) plans offer the option of investing in REITs.

Employees at companies with limited 401(k) choices do have some options. For example, even if you fully participate in your company's 401(k) plan, you can still invest each year in a separate individual retirement account. IRAs allow savers to invest in stocks and bonds and any of the thousands of mutual funds on the market. Some investors are also using IRAs to invest in real estate.

Increasingly, companies are also exploring the use of "brokerage windows" on the theory that broader choices benefit investors. This option, offered by more than 10% of companies with 401(k) plans, allows workers to buy individual stocks and choose from any of the thousands of mutual funds on the market. Brokerage windows gained a fan base in the 1990s, when some employees wanted the freedom to invest in highflying individual stocks. Most 401(k) plans, however, limit what investors can own, usually offering a handful of preselected stock, bond and money-market funds and usually company stock.

Though little more than a novelty two decades ago when traditional company-managed pension plans were in vogue, 401(k)s are today the dominant form of retirement savings. Roughly 400,000 companies offer such plans, representing more than $1.5 trillion in assets, according to the latest numbers.

Politics may also affect investment choices. In response to the wave of corporate scandals that have depleted thousands of nest eggs, Congress wants to allow workers to sell their company shares after a certain period of time. Now, some companies make workers hold such shares until they retire.

Employees who want to change their own 401(k) plan can lobby their company's human-resources department. But, says Kathryn Hopkins, an executive vice president at Fidelity Investments, the nation's largest retirement-savings plan provider, most companies "tend to stick with the tried-and-true and understandable options."

So do investors. Even as the number of investment choices escalates -- nearly 15 choices in the average 401(k) plan -- Fidelity has found that workers own on average just 3.3 funds, a number that is little changed in recent years.

If fact, some say more choices aren't always better. Shlomo Benartzi, an assistant professor at the University of California, Los Angeles, says, "Research shows that having lots of options is de-motivating and ineffective because of the confusion. In extreme cases it can be so annoying that people decide not to join the plan."

While some companies are tweaking their plans, Samco Capital Markets, earlier this year, redesigned what a 401(k) should even look like. The Dallas financial firm did away with its traditional menu of mutual funds, and now offers workers five investment strategies, ranging from low-risk to aggressive, marking what some employee-benefits experts see as an emerging model for 401(k) plans.

Samco workers can choose only one strategy, and the money is managed professionally. Older workers who feel uncomfortable with volatility, for instance, can invest in the "minimum risk" option that targets an annual return of about 6% through a premixed allocation of short-term and intermediate-term bonds, and a small taste of stocks. Younger workers selecting the "aggressive risk" option, meanwhile, own a smidgen of short-term, international bonds and a large dollop of domestic and overseas stocks. It targets an annual return of 14%.

Ford Motor, meanwhile, has scaled back its 401(k) in an effort to make the plan easier for employees to navigate. Because the options were so numerous, a Ford spokesman says employees were "overwhelmed" and "that they didn't have a good idea of what they were doing." Ford has scaled back the number of choices in its plan. The spokesman says, "We felt we weren't doing them a good job of offering them the right options."

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