401(k) accounts generally allow workers to specify how their retirement stash is invested. Most 401(k) plans (69 percent) have between 10 and 19 investment options, while 11 percent offer 25 or more offerings, according to a recent Watson Wyatt survey of 149 companies with over 1000 employees representing 2 million workers.
Depending on the investments chosen, 401(k) fees can vary considerably. Most plans (57 percent) have an average expense ratio between 0.5 percent and 0.84 percent. Only a third of 401(k) plans have expenses less than 0.5 percent, while 10 percent of 401(k) participants pay fees of 0.85 percent or more. Larger 401(k) plans generally solicited lower fees. The survey did not compare the fees charged on actively versus passively managed accounts.
Recordkeeping fees are the most common type of fee retirement savers were charged, the survey found. Most recordkeeping fees were paid by 401(k) participants by subtracting the fee from their investment revenue (44 percent). Another 31 percent of 401(k) accounts charged a direct fee, which was typically paid by the company. In other cases (11 percent) recordkeeping fees were passed on to 401(k) account holders as wrap fees or additional basis point charges on investments.
But too often, employees fail to sign up for their employer’s 401(k) and actively make investment choices. To combat this inertia, nearly half (47 percent) of the surveyed companies now automatically enroll workers in retirement accounts and 32 percent of those who do not are considering it. Typically only new employees are automatically enrolled (77 percent), but 23 percent of the companies surveyed automatically enroll all their workers in the plan unless they specifically opt out. Just over half of the companies with automatic enrollment (51 percent) also automatically increase the contribution rate withheld from employee paychecks. Employees are most often automatically invested in target date or life cycle funds (62 percent) or stable value or money market funds (11 percent).
The most valuable perk of a 401(k) is, of course, your employer’s contributions to it. But about 11 percent of the companies surveyed have suspended their matching contribution and another 15 percent are considering it, Watson Wyatt found. Employers that have frozen a traditional pension plan were the most likely to be considering eliminating the 401(k) match as well.
Once you make it to retirement age, you’ll largely be on your own to decide how to invest and draw down your assets. Only 22 percent of companies surveyed offer a lifetime annuity option that guarantees a stream of income for life. Lack of participant demand and additional administrative responsibilities were the most often cited reasons for not offering an annuity option.
Another survey of 908 401(k) plans with 7.4 million participants released this week by the Profit Sharing/401k Council of America, found that the typical retirement account offered an average of 18 fund choices for participant contributions. The most commonly offered choices were actively managed domestic equity funds (81 percent), actively managed international equity funds (79 percent), indexed domestic equity funds (70 percent of plans), and actively managed domestic bond funds (66 percent).
Tell us, are you happy with your 401(k) investment options?