Investing in 401(k)s just keeps getting more complicated, as investors have to puzzle over an ever-growing number of fund choices.
The average number of investment options in a 401(k) now stands at 13, according to the Profit Sharing/401(k) Council of America, up from about seven in 1996. But while all that choice may be great in theory, the reality is that it has left many investors bewildered.
Most react by dumping their money into only one or two funds. "Regardless of the fund menu, 50% of the people are picking two funds or less," says Dallas-based pension consultant Brooks Hamilton, who noticed the trend in an ongoing examination of 12 large 401(k) plans.
Fortunately, a small handful of employers have sought to help workers navigate through the noise. Below, we profile two companies seeking to help workers invest better.
SwedishAmerican Health Systems
Problem: Employees don't know what to do with their 401(k)s.
Solution: Let a professional money manager run their accounts.
SwedishAmerican Health Systems offers practically unlimited investing choices for employees who want them. But the fact is, most don't.
That has become clear since the health care nonprofit started letting workers opt to have a professional money manager run their accounts back in January 2000.
Alternatively, employees can choose to invest money on their own in a diversified lineup of 10 mutual funds in their 401(k) plans. Or they can invest up to half their assets through a so-called mutual fund "window" that gives them access to up to 300 funds outside the plan.
Guess what? Only a tiny handful of people want that much choice. In fact, 84% of the company's existing 2,800-person workforce has opted for the professional money manager. Employees who don't pick an investment option for their 401(k)s end up in the professionally managed accounts by default. "The general feeling is that people are relieved, it's one less thing they have to worry about," says benefits manager Cindy Thompson.
Take, for example, Dawna Menke, interim director of the regional cancer center at SwedishHealth and a participant in the professionally managed account.
"I'm a working mother, and I don't have the time to monitor finances," she says. "I want to make sure I have a retirement available. But I don't have the financial savvy to
figure out the proportionate amount of high-risk vs. low-risk investments."
Before opting for the professionally managed account, Menke says she had invested her money in a handful of aggressive growth funds, on the advice of family members and friends. Now her money is spread across lower-risk investments.
The firm that manages the accounts, ProManage, uses software to figure an asset allocation for each participant on the basis of life expectancy. The goal is to make the money last until death, not just to the date of retirement. The software also factors in Social Security and defined benefits, which it counts as fixed-income assets.
Then it divvies up an investor's assets among the 10 mutual funds in the 401(k) plan. Once a year, the account is rebalanced to get the allocations back in line. Fees for the service average about $2.92 per year for a $10,000 account.
Currently, there isn't an overall performance record for the professionally managed accounts, because every individual's plan is invested differently. But the funds in the 401(k) plan are assessed quarterly against benchmarks in their asset class to make sure they're performing well enough.
Meanwhile, SwedishHealth's experience suggests that not many employees actually take advantage of the tremendous number of funds available to them. While 15% of the workforce manage their accounts through the 10 funds in the 401(k) plan, only about 1% invest through the mutual fund window that offers hundreds of funds. "It's really one of those things where everybody likes
the fund window and wanted it, but very, very few actually ended up using it," says Tom Koelbl, vice president of human resources at SwedishHealth.
TLC Holding Group
Problem: The funds in a 401(k) all look alike.
Solution: Ditch the copycat funds and make it easy for investors to diversify their accounts.
"After last year, with
and everything else, everybody and their uncle was saying you have to diversify," says Dave Goldin, the controller at TLC Holding Group, a Farmington Hills, Mich.-based educational technology firm with 55 employees.
However, investors in the company's 401(k) found that difficult because of the confusing style-overlap among the 16 funds in its plan. For example, investors could choose from among three large-cap growth funds. "People were saying to us, 'I've got a lot of choices and I don't understand them,'" says Goldin.
The solution: keep the same number of funds, but revamp the offerings to include an investment that corresponds to each Morningstar style box. That has meant paring down on redundant investments, reducing the number of large-cap growth funds from three to one. The other seven funds in TLC's 401(k) plan are a mixture of fixed-income, international and specialty funds.
Just as important as the fund changes, says Goldin, is that employees can now adjust their 401(k) contributions and investments online. They can plug their salaries and expected retirement ages into online calculators that help them figure out whether they're financially on track to retire comfortably. That tends to play well with TLC's workforce, which he describes as "very tech-savvy."
"Everybody wants to know where they will be with retirement, especially with
concerns about the reliability of Social Security. So it's nice to have information to help you gauge exactly how much more or less you need, or if you're right on," says Mary Fairchild, an accountant for TLC who has used the online retirement calculator. "You can look and see if you're investing like a little old lady or like a mogul."
Since the changes went into effect in April of this year, participation in the 401(k) plan has risen from less than 68% to 82%. "People get too passive about 401(k) choices, and this is a way to make them less passive," Goldin says.