Fixing the 401(k)

5) Proactive Advice

Many businesses have teamed up with their retirement plan sponsors to offer employees more detailed guidance on their retirement savings. A range of services are available, from sending a personalized invitation to join the 401(k) or bringing in a formal advisor to guide employees on their rate of contribution, asset allocation, and rebalancing strategy.

“It used to be the old model that everyone on the planet tried to not provide advice to 401(k) participants about investments. They didn’t want fiduciary responsibility,” Harrison says. “What you’re seeing is more and more employers finally coming around to the reality that if you want to encourage someone to put money in a plan, the participants need to understand that the assets are being managed in a prudent manner.” When companies bring in advisors, participation generally goes up and those enrolled contribute more to their funds, Harrison says. Such advisors charge a fee, but only about half of employers pass the fee on to employees, he adds.

Reiskytl has seen more companies sending reminders—invitations to join the plan or an encouragement to increase contributions, accompanied by personalized information on 401(k) tax benefits and savings potential. Gentle reminders can help increase participation rates, Reiskytl adds.

The Roth 401(k) is a new product available as of January 1, 2006. It’s similar to a Roth IRA in that participants pay taxes on their retirement savings before putting them into the 401(k). As with a regular 401(k), contributions can be made with convenient payroll deductions, and employers will typically offer matching funds. When employees retire, they can withdraw the money (after the age of 591⁄2) and not have to pay taxes on it. Owners will be taxed on traditional 401(k) funds when they tap into them. People deciding between the two must make a calculated guess about whether tax rates will be higher now or when they retire, Patterson notes.

Final regulations on how the Roth 401(k) works are still pending, but the Hewitt survey in June found that 30 percent of Fortune 1,000 companies were already thinking about adding a Roth 401(k) to their menu of options. Perhaps employers will find it and other new options useful in encouraging their employees to beef up their retirement savings.