On 401(k)s, many dropping the ball
By H.J. Cummins, Staff Writer
Mpls Star Tribune
Monday, September 26, 2005

Sonja Gauthier had hoped to save about a half-million dollars in her 401(k) account before she retired.  After 10 years and plenty of good intentions, she has only $32,000 tucked away.

Now 40, she keeps meaning to learn more about investing.  But work is busy, and she missed several free advice sessions offered through Edina Realty in Eagan, where she is an office manager.

"I'm not going to make it," Gauthier said.

Gauthier is in a big club.

Plenty of Americans are fumbling their 401(k)s.  And as the accounts have come to replace old-style pensions, the small balances signal that Americans are off to a poor start in taking charge of their own retirements.

Some people never get around to signing up for their company savings plans.  Others are intimidated by lists of investment choices the size of telephone directories.  They often make the wrong choices.  Still others refuse to learn the savings habit.

Half of all Americans in their late 50s have $10,000 or less saved in 401(k)-type plans or personal IRAs, according to the Retirement Security Project in Washington, D.C., an initiative of the Pew Charitable Trusts.  That means many will have to drop their standard of living or work longer than they'd hoped.

Some economists say it's time to stop assuming that everyone can or wants to become accomplished investors, or that this nation's notorious spendthrifts will ever save serious amounts of money on their own.

Some employers have even started to offer relief with a couple of new 401(k) features that basically take back control of their employees' retirement plans.

"Employers used to worry about taking on extra risk by doing any of this," said Nevin Adams, editor-in-chief of Plansponsor, a magazine for benefit plan managers, based in Greenwich, Conn.  "But they're seeing people in their plans two, three, four decades who've got a whopping $10,000 put aside.  And they're wondering who's going to get blamed?"

Pension role reversal

The 401(k) -- and variations on it, such as the 403(b) and profit sharing -- were not intended to carry the show in retirement.

But now Social Security is in question.  And in private industry, old-style pensions have gone the way of gold watches.  In 1981, they covered 60 percent of Americans' workplace retirement plans.  Twenty years later, 401(k)s claimed that 60 percent.

Americans now have $3 trillion saved in 401(k)-type plans at work, said David Wray, president of the Chicago-based Profit Sharing/401(k) Council of America.  That's almost twice the Social Security trust fund.

Sonja Gauthier shows what many working Americans are up against.

Gauthier was an at-home mom until a divorce sent her back to work at age 26.  Her first job in real estate came without benefits.  She went to work four years later at Edina Realty, where she opened her first 401(k) account.

A worksheet she got at the time estimated that she'd need $500,000 in her account if she wanted to retire at her current standard of living when she's 65.

She started saving 14 percent of her salary, but she couldn't keep it up.  The expenses of a household and three children got in the way.  "Once I needed a new refrigerator, or the kids' school pictures cost more than I'd expected, or they wanted to play a sport," she said.

Gauthier still reliably saves a piece of every paycheck, including an employer match.

But like so many investors, she lost about half of her savings in the bear market of 2000-2001, and she has spent the past five years just trying to recover.

"You feel like you're in the middle of a tunnel," Gauthier said. "I know I need to get from Point A to Point B.  You can't go back and you can't go forward, and you're not where you need to be.

"And I know I am going to have to work longer. I can't retire at 60 or 65."

Disastrous decisions

Americans' confusion over their 401(k)s is epidemic.  They make bad choices, sometimes using the "dartboard method" of selection.  They put too much money into their own company's stock, and they often pay administration fees that are too high.

"I didn't know what to do," said Joelle DeCarli, of Deephaven, a chemical engineer at Rosemount Measurement in Chanhassen.  DeCarli, 31, says she's motivated to put money into a 401(k) because of her company's generous profit-sharing plan: Employees who save at least 2 percent of their salaries get a profit-sharing match of 3 to 15 percent.

"It's, 'OK, you've got five funds.  Where do you want to put it?' " she said.  "I don't know.  This is a lot of money, and I don't know what to do with it.

"So, you know, I'd just say, 'OK, I'll take some of this and some of this and little of that,' " DeCarli said.

Others make costly, potentially disastrous decisions.

Donna Bernstrom, in Oakdale, has a 401(k) at Target, through her ex-husband.

She had 60 percent of those savings in Target stock, and it has done well by her.  But her financial planner, Tim Brown of Woodbury, told her that having so great a portion of her money in just one stock could be dangerous.  Now she's cutting it back to 10 percent.  Target stock has been a safe bet for investors, but it is unwise to have a high percentage of retirement saving in any one company stock -- just ask the former employees of Enron.

The lessons didn't stop there for Bernstrom.  At her own job, as a special-ed paraprofessional in the White Bear Lake schools, Bernstrom had picked the 401(k) plan offered by the company that sent a representative into her teachers' lounge.

"That's pretty much how I did it," she said.

Brown told her she was paying too much in fees, and she switched to another plan he recommended.

Big fees leach a lot of money from 401(k)s, Brown said.  "There's sometimes a huge difference, and people don't even know it," he said.

New ideas

Sharon Remmel, who handles commercial real estate and construction loans at M&I Bank, wants someone else to handle her 401(k)s.

Remmel, of Maplewood, signed up for 401(k)s at several jobs over the years.  "I would do that and then never change it.  I never paid any attention to it.  I just knew it was there, and I contributed, and once a year I looked at my statement to see where I was.

"I don't have the knowledge or the time or the desire to keep track of these things," she said.

It's people like Remmel who have U.S. employers considering whether to take over that responsibility.  There are several new possibilities:

The automatic 401(k).  The system automatically enrolls all employees.  Instead of filling out forms to opt in, they have to do paperwork to opt out.  That's just for starters.  The computer programs can automatically recalibrate investment mixes or increase an employee's 401(k) contributions on every birthday or with every raise.

Wells Fargo added an automatic feature to its own 401(k) plan in April, called "Quick Enrollment."  One click enrolls employees, puts 2 percent of their salaries in a moderate investment fund, and then increases the amount one percentage point a year up to 6 percent, said Paula Roe in Minneapolis, senior vice president and director of corporate compensation and benefits.  After rolling it out, Wells Fargo saw enrollments rise 40 percent, Roe said.

Lifecycle funds.  Employees enroll and specify their target retirement date and savings amount.  Then the fund formulas work backward to make all the investment choices to get there.

Managed accounts.  Employers select a financial management firm, independent of its 401(k) provider, and then employees have the option to hire that firm to assume all responsibility for their accounts.

Minnesota Air Inc. in Bloomington will offer managed accounts in its 401(k) to its 70 employees starting this fall, said Heike Harvey, comptroller of the family-owned heating and air conditioning equipment distributor.

Fidelity Investments will be the company's 401(k) provider, and Ibbotson Associates, the management firm.  The management fee will range from 0.35 to 0.60 percent of an account's assets, depending on its size, she said.

"It gives one more option, a cost-effective way for employees who don't have the time or the confidence to make these choices," Harvey said.

Individual planners.  Some people are going one step further and turning over control of their 401(k)s to their own outside financial planner, complete with their account log-ons and passwords.  Some planners clear any move in advance, but some say their clients don't want to be bothered.

"Our experience has been if we need to tell them what to do, it doesn't always get done," said Jerry Wade at Wade Financial Group in Golden Valley, who handles the 401(k)s for 25 clients.

Like Sonja Gauthier, they are busy working people who find it hard to get around to big investment decisions.

Gauthier likes the sound of automatic 401(k)s and managed accounts.

"I think those are great ideas; I'd be game for any of that," she said.  "It's like today's business model -- one-stop shopping -- and I think that's where we're all at these days."

H.J. Cummins is at hcummins@startribune.com.