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Corporate America Scrutinizes Its 401(k)'s

Companies, which are increasingly restoring retirement matches, are giving their 401(k) plans a second look.

BOSTON (TheStreet) -- Companies are increasingly scrutinizing 401(k) providers as they restore employee matches following a year of drastic cost cutting.

Corporate America vows to be more hands-on regarding plan design in the months ahead. Only 9% of companies thought their 401(k) plans were satisfactory and require no changes, according to an online survey of executives at firms with revenue of more than $100 million by CFO Research Services and

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Employee-participation rates, once the measure of success, have become less important over the past decade, while the amount of retirement income and fund performance have emerged as more critical components. Those findings were part of research conducted by human-resources consultant

Hewitt Associates



Plan design is a crucial aspect of a successful 401(k) plan. Even some of the largest companies have failed, at least if widely publicized lawsuits against


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are any indication. If the bosses of the world hold true to their word, their challenge may be to make sure they know what participants are looking for, namely good returns, simplicity and low fees.

"An example of how employers are looking at things differently comes from how they reinstate their company match," says Beth McHugh, vice president of policy development for

Fidelity Investments

. "Rather than just going back to the way it was, what they may be looking at is how to construct this incentive to improve employee behavior. An employer who may have been matching 100% up to a 3% contribution may say, 'You know what, why don't we match 50% up to 6%, something that is cost neutral to the employer but will ultimately drive more employees to save

more and take full advantage."

The foundation of any good 401(k) plan is a quality selection of funds to choose from. But how many options should a plan have?

In the boom times of the 1990s, investment options often ballooned to 40 or more choices. Following the Internet bubble, the Enron scandal and the 9/11 terrorist attacks, skeptical investors demanded more simplicity.

According to Profit Sharing/401k Council of America, plans now offer an average of 18 funds. Hewitt's research shows that companies are increasingly using automatic enrollment and target-date funds to further simplify selections.

The firm's biennial survey of more than 300 mid-sized to large companies found that the share of employers automatically enrolling workers into 401(k) plans has almost doubled in two years, from 34% in 2007 to 58% in 2009. The rate was a mere 19% in 2005.

More than 78% of companies now offer target-date portfolios, up from 28% in 2005, Hewitt says.

"It has now been made easier for employers to use a target-date fund as the default option," says Fidelity's McHugh, adding that once in, employees typically stay the course.

Reducing plan expenses remains a top priority for employers. According to Hewitt's survey, 74% of employers have made efforts to lower costs, up from 57% in 2007. Those efforts include negotiating with current service providers to reduce fees (66%), swapping funds for lower-cost alternatives (51%) and working with fund managers for alternative pricing through collective trusts and separate accounts (18%).

-- Reported by Joe Mont in Boston.