That trusted retirement vessel, the company 401(k) plan, has been taking on water in 2002.
While the government has plans to help keep it afloat, the average investor must be the captain of his own ship. That means scrutinizing your plan’s choices, diversifying your holdings and urging your employer to offer a number of quality investments.
After growing rapidly for years, the average size of a 401(k) account nationwide has declined for two straight years and is down to about $40,000. That’s because stock and mutual fund returns weakened and investor fascination with the market cooled.
Meanwhile, owning your company’s stock had long been considered a positive inducement to work harder and make the company better. It also kept more stock in friendly hands. Eight out of 10 companies permit 401(k) investment in their stock and place no restrictions on how big the percentage can be. Nearly half provide company matches exclusively in their own stock. One-third have employee age restrictions for selling shares obtained through matching.
But that basically good idea can be taken to an extreme.
At Enron, its shares accounted for nearly 60 percent of the 401(k) plan and employees couldn’t sell until the age of 50. Enron stock eventually fell from $90 a share to 26 cents in bankruptcy, decimating the retirement dreams of employees. Making the situation worse, for a time workers were kept from selling all shares due to a “lockdown” to make a change in plan administration, while company top brass sold more than $1 billion in shares.
“In an industry where you can never say the word `guarantee,’ I can guarantee you there are more Enrons out there,” warned Michael Scarborough, president of The Scarborough Group retirement plan consulting firm in Annapolis, Md.
The Bush administration is looking at making changes in the 401(k) and Democrats have a new retirement security bill that would, among other things, cap the amount of company stock at 20 percent and let workers diversify out of stock received in a company match after 90 days.
“A lot of people concentrate in employer stock because they don’t know what else to invest in, and Enron hyped its stock to workers,” observed Corey Rosen, executive director of the National Center for Employee Ownership in Oakland. Whatever changes are enacted, Rosen believes it would be a big mistake to discourage employers from offering a match in the buying of company stock because it’s still a good deal for some of your money. The lockdown concept is also being examined.
“Twenty-four thousand companies changed record keepers for their plans in 2001 and each instance meant a lockdown period when everything was frozen in place,” said David Wray, president of the Profit Sharing/401(k) Council of America in Chicago.
Research the potential of your employer’s stock as you would any investment.
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“For every Microsoft in which employees got rich on their stock, there are 10 Enrons,” said Roy Diliberto, certified financial planner and president of RTD Financial Advisors Inc. in Philadelphia. “Employees should put the maximum contribution they can in these plans to gain the tax advantage and company matching, but they must also diversify the money and consider it long-term.”
In 2002, you can contribute up to $11,000 to a 401(k). This will increase by $1,000 each year until 2006, when it will increase by $500 per year. If you earn more than $90,000 annually you may be subject to added restrictions. Matching contributions from your company aren’t included in the $11,000 maximum. They fall under the maximum combined contribution, which can’t exceed $40,000 or 100 percent of your annual salary, whichever is less.
The Morningstar research firm in Chicago has long been credited with having a model 401(k) plan boasting a variety of stock and bond choices. The best-performing stock funds in Morningstar’s plan have been Oakmark Select (OAKLX), with three-year annualized return of 18.65 percent; and Fidelity Low-Priced Stock (FLPSX), three-year annualized return 16.61 percent. The worst is Harbor Capital Appreciation (HACAX), with a three-year annualized decline of 2.51 percent.
The most recent addition is Vanguard Calvert Social Index (VCSIX), down 18.65 percent in the past 12 months (no three-year return yet for this fund) but considered to have bright prospects. Another addition is Tweedy, Browne Global Value (TBGVX), with a three-year annualized return of 9.90 percent.
The bond funds are PIMCO High Yield (PHDAX) and PIMCO Total Return (PTTAX).