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401(k)s get makeover after ugly scandals

There are reasons why you shouldn't bother to contribute to your company 401(k) retirement plan this year:

You might win the lottery.

Long-lost relatives could leave you a generous inheritance.

Instructional tapes from late-night TV infomercials might put you on the path to lifetime financial security.

Such things do happen. I'm not 100 percent sure on the last one, but I do know the first two have happened to some people.

On the other hand, if you aren't counting on a windfall, continue to be one of the 80 percent of eligible employees who contribute to their 401(k). If you're in the remaining 20 percent who don't, start now. It builds a nest egg over time while reducing taxable income. Your company may also match a portion of your contribution.

Here's the problem: Negative mutual fund returns during the bear market, coupled with the high-profile mutual fund trading scandal, may give employees pause as they ponder their current holdings and future contributions.

Furthermore, settlements have been reached this year with tens of thousands of employees of disgraced Enron, WorldCom and Global Crossing, whose 401(k)s hemorrhaged because they were loaded with their companies' stock.

Most of the 15 million U.S. workers invested in 401(k) plans did patiently stay the course as long-term investors in 2003, with assets growing 29 percent to average nearly $77,000 per employee. Still, why should a worker contribute hard-earned dollars to something that doesn't always go up in value and might not give investors a fair shake?

The surprising solution: All the bad investment news gave employers an opportunity to lay down the law with 401(k) providers. They're unloading providers whose mutual funds have worrisome reputations or lackluster results.

They're also demanding a reduction in fees. Some providers enjoy profit margins as high as 80 percent from fees they're charging the plans.

"Companies are getting much tougher on plan providers because they now have the perspective of looking back on bad market years with negative returns as well as the good years," said Tom Belisari, certified financial planner with Key Financial Inc. ( in West Chester, Pa. "Mutual fund companies are cutting their fees and renegotiating compensation in hopes of keeping 401(k) money."

Some of the most publicized offenders have been booted.

Putnam Investments has lost tens of billions of dollars in retirement assets, including $1.2 billion from the California Public Employees' Retirement System. After making an earlier partial settlement with the government, Putnam recently enacted new disclosures regarding its fees, brokerage commissions and executive pay.

"We're seeing some 401(k) plans, especially the large public ones, drop funds that were tainted, though most are taking a wait-and-see attitude," said Rick Meigs, president of in Portland, Ore. "They're in the driver's seat because there are plenty of people out there who provide high levels of service for a competitive fee."

Due to past problems, half the companies with 401(k)s are now offering investment advice to employees about their asset allocation. Competition is keen among firms offering such advisory services. Meanwhile, there is increasing unanimity about what constitutes a solid 401(k) these days.

"The benchmark number of investment choices for a 401(k) plan is 10 to 12, and just about everybody offers daily valuations and transfer," said Brent Glading, managing director of the Glading Group ( in Montclair, N.J., which specializes in studies of retirement plans. "If a plan doesn't offer that, the investor should realize it is way behind the times."

The amount of 401(k) money in stock funds was 45 percent at the end of last year, according to the Investment Company Institute. Despite down periods, stock offers the best long-term potential, and stock index funds are especially popular. Nine percent of 401(k) dollars were in balanced (stock and bond) funds, 16 percent company stock (don't overdo that), 10 percent bond funds, 5 percent money funds and the remainder in instruments such as guaranteed fixed income contracts (GFIC) and stable-value funds.

"GFICs traditionally offered by the insurance companies are being phased out because there are already fewer of them around and they don't perform as well in a rising interest rate environment," said Eric Turloff, chartered financial analyst with Turloff Financial Consulting Inc. ( in Seattle.

As Americans change jobs, the decision whether to keep your 401(k) money with your prior employer's plan or move it into a self-directed individual retirement account or your new employer's plan looms large.

Here are three opinions:

"Keep your money with the former employer unless you are paying a record-keeping fee, which isn't required by most plan service providers," said Glading. "Why move it?"

"Move it, since I talk to dozens of employees each month who completely lost track of their 401(k)," said Meigs. "Companies go bankrupt, get sold, change names or switch locations, so moving your money to your new employer's plan or an IRA makes sense."

+"Look at the options the past employer offers to see whether they're decent and then ask yourself how often you actually look at your account," said Belisari. "Nine times out of 10, I'd get out because nobody is tracking it and the money should therefore be put in a new account to receive more attention."

Andrew Leckey answers questions only through the column. Address questions to Andrew Leckey, "Successful Investing," P.M.B. 184, 369-B Third St., San Rafael, Calif. 94901-3581, or by e-mail at