THE VIRGINIAN-PILOT
Copyright (c) 1994, Landmark Communications, Inc.
DATE: Monday, October 17, 1994 TAG: 9410150147
SECTION: BUSINESS WEEKLY PAGE: 10 EDITION: FINAL
TYPE: Cover Story
SERIES: Personal Finance
SOURCE: By Dave Mayfield, Business Weekly staff
LENGTH: Long : 243 lines
John Jensen, at age 29, saves like a man bent on enjoying a lavish retirement.
He puts 10 percent of his gross pay into a 401(k) savings account. Combined with another 3 percent kicked in by his employer, Metro Information Services Inc. of Virginia Beach, Jensen is socking away more than $400 a month.
Social Security? Jensen's not counting on it. ``I don't think it will be there,'' he says, ``at least not in any amount I can use.''
Jensen is one of an increasing number of Americans who are relying on 401(k) savings plans to carry them through the Golden Years.
Fifty percent of U.S. workers surveyed last year by the Employee Benefit Research Institute said they expect 401(k)s to provide their principal retirement income. That was up from 26 percent who felt that way only five years before.
The trend toward such retirement plans is a revolutionary change. 401(k) plans, while sponsored by and often contributed to by employers, switch most of the responsibility for saving and investing to workers themselves.
How much workers can draw from a 401(k) at retirement depends largely upon how much they contribute to the plan and how their investment choices perform over the years.
That's a radically different concept from traditional defined-benefit retirement plans. Those plans are completely employer-funded and -controlled, and the actual benefits are fixed well in advance.
The cost and complexity of maintaining the traditional pension plans is driving employers to 401(k)s.
Within 10 years, some analysts predict, the assets in 401(k) and other so-called defined-contribution plans will exceed those in traditional defined-benefit plans - at least in the corporate sector.
It's almost unheard of these days for a company that doesn't yet have a retirement plan to choose a defined-benefit plan over a 401(k).
But as 401(k)s and other similar plans have grown highly popular, disturbing questions are being raised about these retirement vehicles.
Are employees knowledgable enough about stocks, bonds and other financial instruments to avoid making unwise, even disastrous, investment choices?
Are they putting away enough money to carry them through retirement?
Are employers contributing enough?
Employers have been forced in the past several years to closely re-examine their plans, pension experts say, as the assets of an increasing number of individuals in 401(k)s have grown into the tens of thousands, even hundreds of thousands, of dollars.
``Employees are telling their employers, `Hey, I've got a lot of money invested in here and I'm not an investment expert. I need some help,' '' said Jeff Close, communications director for Access Research Inc., a Windsor, Conn.-based company that tracks 401(k) plans.
Close said employers are responding to this cry by beefing up education efforts, increasing the number of investment choices in plans and, in some cases, matching more generously their workers' contributions to 401(k)s.
In many cases it doesn't even cost employers more, he said. That's because competition among banks, mutual-fund groups, insurance companies and brokerages to manage retirement-plan assets has become so intense that they're slashing service fees even as they improve service levels.
Another factor driving growth in 401(k) plans is the improving job market.
Whether a company offers a 401(k) and, if it does, how generously it matches employees' contributions are becoming increasingly important factors in attracting talented workers, said John M. Peterson, head of the employee-benefit services department at Norfolk accounting firm Goodman & Co.
``We try to convince all of our clients to have these plans,'' he said, ``because so many prospective employees are familiar with them these days.''
In the interest of staying competitive, Virginia Beach-based Hall Auto World is planning to beef up its 401(k) plan, said Kevin McHugh, chief operating officer.
Hall now offers the 640 employees of its 10 dealerships a choice of three 401(k) investment funds. Next year, it's planning to expand the menu to as many as 11 choices, McHugh said.
``You have to give your employees a wide range of options,'' he said, ``to allow them to actualize their goals.''
Although Hall contributes up to 2 percent of an employee's wage as a match to his or her contribution, nearly 30 percent of Hall's employees don't participate.
McHugh said dealership managers are regularly encouraged to try to talk employees into joining the 401(k), Hall Auto's only retirement plan. ``We tell the managers, it's not just 640 people depending on this,'' he said, ``it's 3,000 people. It's spouses, children, elderly parents and so on.''
There's another incentive for senior managers to keep enrollment high. The Internal Revenue Service's anti-discrimination rules for retirement plans sharply limit participation in 401(k)s by highly paid workers if other employees don't join up.
Norfolk-based Miller Oil Co. Inc. has run into this predicament. Only about 35 percent of its 350 employees participate in its 401(k), said A.C. ``Gus'' Miller, president of the company, which operates convenience stores and provides heating and air-conditioning services. That is despite the fact that Miller Oil has matched its workers' contributions by as much as 40 cents for every dollar they put in.
Miller said he's not blaming the nonparticipating employees. ``It's very difficult for some people to set money aside every paycheck,'' he said. ``They need their money just to live.''
Bernard Maddrey is a Miller Oil employee who does take advantage of the plan.
A heating and air-conditioning technician, Maddrey describes himself as ``a very disciplined person.'' With his and the company's 401(k) contributions, he's putting away more than $300 a month.
But, at 45, he's not sure he's investing enough or making the right investment choices.
At least once a month, he said, he calls Miller Oil's employment office to check on his stock funds. ``I hate to be a nuisance,'' he said, ``but it is my retirement. I worry all the time.''
Maddrey says he'd prefer to have professionals make investment choices for him.
But for every individual like Maddrey who is a reluctant investment picker, there is the 401(k) participant who likes being in control. Indeed, that very responsibility has helped encourage more individuals to take advantage of the plans.
Employee-benefit lawyer James R. Warner Jr. said another attraction of 401(k)s is that they are easy to understand. Workers get their quarterly or annual statements, showing how each investment choice is performing.
Warner, who's with the Norfolk law firm of Willcox & Savage, said: ``When you talk about a defined-benefit plan being a percentage of the average of their salary for the last three years before they retire, that's hard for somebody who's 25 to fathom.''
One of the best features of 401(k) plans, Warner said, is their portability.
Any contribution that an individual makes to such a plan is transferable if one changes to another employer with a 401(k). So are the previous employers' contributions, so long as one stayed on through the vesting period required to hang onto that money - a maximum of five years.
In today's working world, with employees changing jobs more frequently, such portability is an important feature, Warner said.
But he said in some cases - given the choice between an employer that offers only a 401(k) and one that offers a defined-benefit plan - workers would be better off going with the more traditional employer. Generally, the older an employee is, Warner said, the higher the likelihood he or she would be better off in a defined-benefit plan.
Warner is one of those benefits advisers who is pushing his employer clients to spend more time educating workers about 401(k)s. A new regulation of the U.S. Department of Labor gives limited protection from liability to employers that regularly distribute information about their plans, provide at least three diversified investment options and allow four or more investment reallocations each year.
Norfolk Southern Corp. will meet all those requirements when it offers its 20,000 unionized employees a 401(k) starting in April 1995, said Perry J. Gilmer, assistant vice president-personnel services.
One of the key educational tools will be a videotape that will be mailed to workers' homes, he said. That way, other family members can join in the 401(k) planning. ``In a lot of cases the spouse is the person who conducts the family's business anyway.''
Gilmer said Norfolk Southern's educational materials will toe a fine line. ``We cannot give investment advice,'' he said, ``but we can give information about the characteristics of the investments.''
One of the results of the increased emphasis on education by companies like Norfolk Southern is that investment mixes are changing: away from fixed interest-rate funds to more speculative stock and bond funds that generally pay higher rates of return.
A recent study by KPMG Peat Marwick, the big accounting firm, looked at what would happen to an employee who invested $1,000 a year for 30 years. A stock mutual fund averaging an annual return of 10 percent would pay retirement income of $15,400 a year for 25 years, the study found, while a fixed-rate fund paying 4 percent would leave the same person with only $5,250 a year in retirement.
In the past, the focus among investors has been to play it safe. ``We're finding out that just as bad a case is to be too conservative and not even keep up with inflation,'' said Gary J. Kitts, who oversees 401(k) plan administration for Norfolk accounting firm Frederick B. Hill & Co.
John Jensen, the Metro Information programmer/analyst who is dutifully saving, has heeded the new thinking.
He has all of his 401(k) money in a diversified stock fund, and says he intends to transfer some assets to an even-riskier international stock fund if Metro makes such a fund available.
One of his co-workers at Metro, personnel generalist Gwen Hyman, is similarly invested.
At 28, she's putting away more than $150 a month and getting compliments about her foresightedness.
``What I've heard most from people is, `You're really smart. I waited until I was 30 before I started thinking about retirement . . . or 40.' ''
``I'm trying to be aggressive about it,'' Hyman said. MEMO: [For a related story, see page 12 of The Business Weekly for this
date.]
ILLUSTRATION: On the cover: Illustration by Kelcey Newman
John Jensen
Perry J. Gilmer
John M. Peterson
MISHANDLING YOUR NEST EGG
KRT
HIGH RISK FOR THE LONG TERM
[For a copy of the graphics, see microfilm for this date.]
401(k) BASICS
401(k)s are employer-sponsored payroll-deduction savings plans in
which employees decide how much of their pay to contribute. Often,
employers match a portion of the employee's contribution to the
plan, but they are not required to do so. All income taxes are
deferred on the contributions to the plan, as well as on the
investment gains, until the money is actually withdrawn.
401(k)s are what are known as ``defined-contribution'' plans.
Unlike traditional ``defined-benefit'' plans, which are fully funded
by employers and which pay a fixed, predetermined rate to retirees,
401(k)s offer no guarantee of how much money workers can draw from a
401(k) at retirement. It depends upon how the investments that they
choose for their 401(k) assets perform over the years and also upon
how much the employer decides to contribute.
401(k)s, which apply to employees of for-profit enterprises, have
two counterparts in the nonprofit sector. 403(b)s are for employees
of public schools and certain religious, charitable, health care
and research groups. 457 plans are for employees of state and local
governments. 401(k)s are by far the most common of the three plans,
with an estimated 17.5 million active participants last year
compared to 3.3 million in 403(b)s and 2 million in 457 plans.
There are limits on how much can be contributed each year to
401(k)s. In 1994, the limit for an individual employee's
contribution is $9,240. The limit for the combined contribution of
employer and employee is $30,000 per employee, or 25 percent of the
employee's total compensation, whichever is less.
Many 401(k) plans allow participants to take out loans using
their assets in the plan. The money must be repaid with interest.
Employees can withdraw money from the plan without paying it back,
but if they do so before age 59 1/2, they must not only pay normal
income tax on that money but also a 10 percent early-withdrawal
penalty.
If workers changes employers, they can move their 401(k)
contributions to the new employer's 401(k) without penalty. But the
previous employer may limit the amount of its matching contributions
that can be transferred if the departing employee had less than five
years' service.
by CNB