The Dwindling 401k Match and a Pair of 401k Reform Bills
Two recently introduced bills aim to clean up some shady 401(k) practices. Though they could provide some welcome clarity and cut out some less than ethical investment advisor practices, they won't save 401(k) plans from perhaps their biggest short term threat: the disappearing employer contribution match.
Last week, two 401(k) related bills moved forward in the House. Both aim to provide transparency to those who participate in 401(k) plans.
The 401(k) Fair Disclosure for Retirement Security Act would require that fees associate with 401(k) plans be disclosed on quarterly statements, in simple dollar amounts (not percentages), and broken down into investment management fees, transaction fees, administrative fees and other fees.
The Conflicted Investment Advice Prohibition Act perhaps has a little more meat on it that could prevent some problem 401(k) investments (and some 401(k) losses). It would prohibit investment advisors from offering investment advice on 401(k) plans if the advisor has an interest in any of the funds in which plan participants invest. It would also prohibit an investment advisor from advising on a 401(k) if the plan's choice of investments would affect the advisor's income.
As reported by US News & World Report, both bills are now before the full House Education and Labor Committee.
Helping participants understand the fees they pay and cutting out some of the conflicts of interest would both improve 401(k) plans. However, in the short term, the growing number of employers cutting off their matching contributions threatens employee participation and retirement planning.
According to Reuters, survey data collected by Charles Schwab from 107 HR executives in a range of business sizes and types indicate that as a result of the economic downturn, they have, or are planning on eliminating their matches to employee 401(k) plans.
According to Investment News, the numbers are even more bleak for small businesses. It cites a survey conducted by Nationwide Financial Services of Columbus, Ohio which found that 44% of small employers say they may have to stop matching. And that might be a conservative estimate. A survey conducted earlier this Spring by The Hartford Financial Services Group found 56% of small business respondents worried they will not be able to continue matching.
The full Charles Schwab report shows that this is far from an easy decision for employers to make. They know that the employer match is viewed by an overwhelming number of employees (86%) as the number one benefit of having a 401(k).
The good news (besides legislation cleaning up some 401(k) practices) is that most view the halting of employer contributions as temporary. In an eventual rebound, with defined benefit plans seeming firmly in the past, matching retirement contributions will remain a lure for employees.
- Survey: Employees Can't Quantify 401(k) Fees Paid (US News)
- Tapping an IRA or 401(k) without taking a heavy tax hit (Reuters' Entrepreneurial)
- 3 Ways to Get Your 401(k) Back on Track (US News)
- Building a Better 401(k) (Forbes)
- A Look at 401(k) Plans for Employees (FindLaw)