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TheStreet Open House

The 401(k) Bill of Rights

NEW YORK ( TheStreet) -- It's 2003, and the 47 million investors in 401(k) plans are largely a nation of Rip Van Winkles: They've been asleep for 20 years, as the retirement landscape has been completely reshaped. Wake up, investors! It's time to demand your rights.

We're going to help you do just that, with our 401(k) Bill of Rights, below. Print it out, pass it around, hand it to your employer. Let employers know what they need to do to provide good 401(k) plans.

In too many instances, individuals don't realize that their employers aren't meeting their fiduciary responsibility as plan sponsors. Meanwhile, many consultants and investment managers who provide 401(k) plan services charge excessively high fees and are monuments to conflicts of interest.

As the culmination of our series of the crisis in the 401(k) industry, TheStreet offers the 401(k) Bill of Rights, a list of 10 common-sense demands for 401(k) plans. We encourage you to print this document and hand it over to the folks in the Treasury or human resources department and insist that your demands be met.

No longer will individuals tolerate a 401(k) plan that has no clearly defined and monitored investment policy! No longer will individuals tolerate a 401(k) plan littered with inadequate, overpriced and underperforming investment options! No longer will individuals tolerate clandestine relationships among the consultants, mutual funds and brokers who are charged with looking out for the best interests of the individual!

Pardon the proletarian rhetoric. We believe it is warranted: Millions of retirements hang in the balance. Most companies have a genuine desire to provide the best 401(k) plan they are capable of providing. For them, this 401(k) Bill of Rights should serve as a template. For the plan sponsors that have too long taken a cavalier and irresponsible approach to their employees' retirement plans, let this Bill of Rights serve as their guide.

1. An Investment Policy Statement

Employers who sponsor 401(k) plans are required by law to have an investment policy. Nonetheless, 42% of all 401(k) plans lack a formal investment policy statement. While the law doesn't stipulate that the policy statement be a written document, every 401(k) participant is entitled to a written statement from their employer that stipulates the mission of the plan, the investment principles that govern the plan and the measures the sponsor will take to ensure the investment policy is met.

Sponsors, it behooves you to formalize an investment policy statement and disseminate it among your 401(k) participants. With companies such as Lucent and WorldCom facing lawsuits over mismanagement of their retirement plans, it is more costly to be without such a clear statement. Participants, meanwhile, should be vigilant in ensuring that the plan is living up to its investment statement. If the policy stipulates that the plan will seek the lowest-cost offerings of mutual funds and the plan is loaded with fund classes with excessive fee structures, it is your right to demand a change.

2. Full, Clear Disclosure of All Fees

Plan participants have a right to know exactly how much they are paying for their plan. Every participant is entitled to know who gets paid, how much they receive and what form of payment the compensation takes. This should be a simple, one-page item that is prominently presented in the plan literature.

The mutual fund industry, as well as insurance companies and Wall Street firms that provide 401(k) investment services, wish to portray retirement-plan fees as a nebulous terrain too thorny to navigate. They maintain that the process of personalizing the cost structure would be prohibitively expensive. However, according to the General Accounting Office, it would cost $1.35 per account. Meanwhile, 401(k) plan participants pay as low as 0.10% to as high as 3% for their plans. The Vanguard Group has set the standard on cost disclosure. The rest of the 401(k) industry must follow.

3. Full Disclosure of All Business Relationships

Individuals are entitled to full disclosure of every business relationship that exists between the various parties engaged in stewarding their 401(k) plan. Consultants and investment firms hired to serve the needs of the 401(k) participants often have business relationships that raise the potential for a misalignment of interests that call into question the parties' ability to serve the plan responsibly.

All relationships between consultants and the mutual funds they recommend -- and all other revenue-sharing relationships -- must be fully and plainly disclosed in a simple document.

4. Diverse Array of Institutional Class Funds

Every 401(k) plan has a responsibility to offer mutual funds in an array of asset classes that enable each investor to build a diversified portfolio to meet every age and risk level. At the minimum, 401(k) plans should consist of a mix of large-cap and smaller-cap funds, growth and value funds, international funds and bond funds.

Furthermore, 401(k) plan participants are entitled to the lowest-cost share class of each of these funds. Many mutual funds are offered in a variety of classes, which range from low-cost institutional shares to classes that charge hefty loads, 12b-1 fees and expenses. 401(k) plan participants must demand the lowest-cost class of each fund -- or demand alternative funds that have lower expenses.

5. Any Match Should Not Go Exclusively to Company Stock

In the best of all worlds, all employers would have a matching contribution system in place in their 401(k) plan -- and, certainly, all large employers have the ability to do so. 401(k) participants should ask their employer for such a plan.

Meanwhile, every 401(k) plan that does include an employer match system should go to all investment options -- and not exclusively to the employer's stock. Plans that only match individuals' contribution to the employer's stock greatly increase the risk of overexposure to the company's fortunes. From Studebaker to Enron, this is a dangerous precedent. Every participant whose plan has an employer match program is entitled to have matching contributions for all investment options.

6. Education

All 401(k) participants are entitled to education and advice on the investment options within their plan. Participants are entitled to instruction on assessing mutual funds, building a diversified portfolio and meeting the savings level required to achieve their retirement goals.

The best option for this advice is one-on-one advice, either via telephone or in face-to-face meetings with the plan's consultant or investment firm. However, only 16% of defined-contribution plans like 401(k)s offer one-on-one advice. Individuals should demand access to professional and unbiased investment advice and education to help them achieve their retirement goals.

7. Automatic Enrollment and Automatic Increases

Every 401(k) plan in America should have an automatic enrollment plan in place for employees, unless employees opt out. The default option for the investment should be either a stock-bond asset-allocation fund (a 60% stock-40% bond fund, for instance) or, preferably, a "lifestyle" fund that serves as a one-step asset-allocation plan for the automatically enrolled investor.

Further, every 401(k) plan should offer participants the option to make automatic increases in payments as their salary increases. A growing number of plan providers are offering these invaluable options -- simple steps that go a long way toward overcoming the inertia and lack of investing education that imperil many participants' plan. Every participant should demand these options.

8. Index Funds

Every 401(k) plan should give investors the option to build a diversified portfolio using only low-cost index funds. The overwhelming evidence demonstrates that low-cost, passively managed funds are the most prudent investment option for most individuals and institutions. Nonetheless, many 401(k) plans do not offer a single index fund -- let alone enough to build a portfolio of index funds.

According to Greenwich Associates, public sector plans have 57% of their U.S. stock investments in index funds and corporate pension plans have 33% of their stock investments indexed. The "smart money," or institutional money, is investing more and more in passively managed funds -- 401(k) investors should have the same option.

9. The Plan Sponsor Pays the Fees

In an increasing number of 401(k) plans, the plan sponsor effectively passes off the costs of the plan to the participants, thanks to arrangements with the service providers. In roughly one-third of all plans, employers now bill participants for administrative costs of 401(k) plans, up from 7% in 1995.

This setup not only saddles investors with a cost burden, but leaves a wider space for hidden fees turning up in the fund's costs as part of "bundled services." To combat these problems, every 401(k) plan should be paid for out of the sponsor's pocket. 401(k) participants should demand that their employer actually pay the costs of administering and servicing the plan -- that is the only way to ensure that the sponsor is keeping costs in line.

10. No Soft Dollars

Soft dollars -- revenue-sharing arrangements between brokers, mutual fund firms, consultants and other 401(k) industry parties -- are endemic. Nearly four-fifths of all fund firms accept soft-dollar commissions. At most firms, it is the way things get paid for -- and they are only called soft because it's not their money, it's yours. While not inherently bad, these arrangements are fertile ground for abuses among the firms supposedly dedicated to serving the participant.

The Securities and Exchange Commission is unlikely to ban soft dollars, but individual 401(k) participants are entitled to banish them from their plans. 401(k) plan participants have the right to ask their sponsor to invest only with mutual fund companies that disavow the practice of soft-dollar arrangements.

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