Your 401K May Soon Get More Complicated

If employees don't already have enough good reasons to think carefully about how to invest their retirement dollars, they may have one more on Jan. 1. That's when new Labor Dept. rules take effect that will enable employers offering 401(k)s and other so-called defined-contribution plans to wash their hands of legal responsibility for losses resulting from workers' poor investment decisions.

To get off the fiduciary hook, employers will have to offer at least three broad, diversified investment options, supply sufficient information on the plan and picking investments, and permit asset shifts at least every quarter. If the plan offers especially risky selections, such as global or sector funds, workers must be able to move money out as often as "appropriate."

Employers aren't required to comply with the rules, contained in Section 404(c) of the Employee Retirement Income Security Act of 1974 (ERISA), but many companies are making adjustments to escape potential liability. For example, those that offer only fixed-income funds may add, say, a blue-chip equity and a growth fund. Although plan sponsors have generally been increasing their options anyway, some still have just one or two selections. They're also bringing in mutual-fund managers, such as Fidelity Investments and Dreyfus, to hold financial planning seminars, and hiring benefit consultants, such as Towers Perrin, to prepare training materials.

LAGGARDS. Thanks to the rules, employees who never had to make difficult decisions about allocating retirement kitties will soon be forced to think harder about this. Planners say the most common mistake workers make is putting all their money in the most conservative funds, such as money markets, or those guaranteeing a set rate of return. Over the long term, adds a Labor Dept. benefits specialist who helped draft the regs, "the difference between 7% and 10% may mean the difference between a comfortable retirement and living on the edge."

In general, planners counsel younger employees to invest relatively more money in stocks and less in bonds and fixed investments. As they get closer to retirement, they can shift assets into less volatile, income-producing funds. Jeffrey Franklin, president of Franklin Planning Associates in New York, advises making whatever 401(k) contribution is necessary to trigger the largest possible employer-matching contribution.

Incredibly, some employees still aren't taking advantage of 401(k) plans at all, says Susan Olin, an underwriting manager for John Hancock Financial Services. She thinks that the new education programs could help change that. Her message to laggards: Get with the program.

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