Consumer Reports: Does your 401(k) plan need a makeover?

Given how tough it can be for many people to save for retirement, it's unfortunate that some companies make it even more difficult. But a large number of 401(k) plans do just that by imposing high costs and offering subpar investment choices, says Consumer Reports.

Until recently, employees were stuck with whatever retirement savings plan their company offered. In the last few years, however, they've been fighting back. And now, employees have the law on their side. Earlier this year, in a lawsuit against Edison International, a company that operates electric utilities in Southern California, the Supreme Court unanimously ruled that because of the Employee Retirement Income Security Act, companies have a legal responsibility to continuously monitor investments in retirement savings plans and, if necessary, remove imprudent investments.

So how can you tell whether your plan is a dud? Consumer Reports offers this advice.

-- Look at the expenses of the funds. You can find them by logging in to your account online or looking at the prospectus for the funds you own. They may also be listed in your plan's statement. If you see a number of funds with expense ratios (the annual cost of maintaining a mutual fund) of more than 0.75 percent, you probably have a high-fee plan.



-- Examine the funds provided by your plan. A large number of options isn't necessarily better. In fact, too many investment choices can be confusing and cause you to succumb to "analysis paralysis." A well-diversified 401(k) plan will include a selection of stock funds, including large-company and small-company funds; international funds; and perhaps a total market fund as well as a broad-based bond fund. The plan should also include cheaper index funds.

-- Check whether your plan offers target-date funds. Those mutual funds automatically reallocate the mix of stocks, bonds and cash as you age. Their fees may be higher than index funds -- 0.78 percent, on average, according to Morningstar, the investment research company -- but they're a good way to manage risk as retirement draws nearer.

If your plan has expensive funds and falls short of good options, the solution may be to encourage your employer to improve it. Here's how to do that:

-- Find the fiduciary. That person is your primary contact for all correspondence and is listed in the documents. Or you can ask your employee-benefits manager for the correct name and contact information.

-- Collect documents. Look up the fund expense ratios in the annual disclosure of your expenses. You'll see in the report an explanation of each fund's average annual returns over one, five and 10 years; the comparable returns of a benchmark fund; and the average annual operating costs as a percentage of assets and as a dollar figure per $1,000 invested. You also should receive a quarterly fee statement showing additional expenses specific to you, including loan administration fees.

-- Research new funds. Search for similar alternatives at such low-cost fund families as Vanguard or T. Rowe Price. Then compare the candidates with a comparable index fund at the website of the Financial Industry Regulatory Authority (finra.org/fundanalyzer).

-- Present your argument. Write to the fiduciary with the details of your research. Consumer Reports recommends emphasizing how the costs affect not only you but every employee who invests in those plans. Ask co-workers to sign your letter.

-- Consider alternatives. Even if the plan is crummy, if your company matches your contributions -- and most do, although the amounts vary widely -- it may be worth staying to get the free money. Contribute the minimum amount -- usually at least 3 percent of your salary -- to take full advantage of the match. If the investment options are pricey and there's no match, stash your savings in an individual retirement account, where you make your own investment choices.

-- Check your spouse's plan. If it's better than yours, consider maximizing contributions to it.

For more information, check out the report online at ConsumerReports.org/cro/401kmakeover.

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