Roanoke Times
Copyright (c) 1995, Landmark Communications, Inc.
DATE: MONDAY, March 15, 1993 TAG: 9303160012
SECTION: BUSINESS PAGE: A-8 EDITION: METRO
SOURCE: MAG POFF STAFF WRITER
DATELINE: LENGTH: Medium
LAW PUTTING 401(K) PLANS INTO HANDS OF EMPLOYEES
A new law has put a huge burden on people who have 401(k) plans at work. Considering the popularity of the retirement savings programs, that includes millions of working Americans.Under the new law, they, and they alone, are responsible for growing their own money into a fund large enough to finance their own retirements.
At the same time, they should find their choices expanded so that they can pick the best option for their situations.
The law, which became effective Oct. 13, is known as the Employee Retirement Income Security Act. It controls handling of 401(k) retirement plans in workplaces.
Companies that choose to come under its wings can comply by the first day of the second plan year after the effective date. For companies operating their plans on a calendar year, that date would be next Jan. 1.
Most companies will adopt 404(c) plans, which are named for the act's number in the federal code, said J. Gregory Tinaglia of Investment Management Corp. in Roanoke.
He called it "a smart move for the company." And, Tinaglia predicts, businesses will adopt them for competitive reasons because employees want meaningful choices and information.
The intent of the act, Tinaglia said, is to relieve retirement plan sponsors, trustees and managers from liability for investment losses resulting from participants' control over assets in their accounts.
To gain that advantage, however, a company must give employees:
A choice of a broad range of investment alternatives that allow diversification among those alternatives. Many companies already do this, but others have very limited options, such as company stock.
An opportunity to change those choices with a frequency that is appropriate in light of market volatility.
Sufficient information to make informed investment decisions.
Although companies would no longer be responsible for individual accounts, Tinaglia said, they must still monitor overall performance of the funds they use.
If all of a company's investment options perform poorly, he explained, the government might say that employee choices lack diversification.
But if a company adopts such a plan with adequate options, Tinaglia said, participants no longer can complain about a lack of choice.
This means workers must make their own choices based on their own goals, nearness to retirement, family circumstances and other investments.
Tinaglia said the law sets forth nine kinds of information that a company must provide about its plan.
But, he pointed out, there's "a loophole" because five other kinds of data must be given only on request. See the accompanying chart for details.
He suggested that, when a 404(c) plan is adopted, participants request all of the information in order to protect themselves. Without all of the data, he said, people will be less informed than they should be.
There's also a big difference in investment choices sponsored by mutual funds, on one hand, and by banks and insurance companies on the other.
He explained that a mutual fund prospectus provides adequate information, while banks and insurance companies have no equivalent form of disclosure.
People choosing options other than mutual funds, he said, should dig harder for information about costs, underlying investments and risks.
Workers planning for their retirement must do more homework than they have done in the past. Tinaglia said they must read and understand all the information they receive.
He expects employers to provide stock, bond and income funds in their basic plans.
Options should provide for growth funds, funds that are balanced between growth and income, and income funds.
Individuals in the plan must allocate their money based on age and family circumstances on one hand and market and economic conditions.
Choices must be modified over time, he said, according to individual situations and the economy.
His recommendations for long-term averages assume a relatively stable market. Examples are provided in the accompanying chart.
Most people tend to be too conservative, he said, so they are in danger of having too little money for retirement. He recommends that people always make their stock allocation first.
Tinaglia would never have less than 10 percent in stocks to provide an opportunity for growth.
A young person might have up to 80 percent of his retirement portfolio in stocks for a growth portfolio, he said, but even an income portfolio could have as much as 30 percent.
He recommends that everyone have at least 20 percent in bonds for balance. But a young person aiming for growth could avoid cash equivalents entirely.