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Factor to Assess
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Score
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Explanation
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| Employee Contributions & Employer Match |
| 1 |
Does your plan allow you to defer (contribute) the full amount allowed by the IRS ($16,500 for 2010)? Or, are deferrals limited to a lower amount by the plan. |
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Reason: The higher the limit on tax deferred 401k
contributions, the better the opportunity you have to save
for retirement.
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Maximum allowed by IRS |
Score 5 |
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Less than maximum allowed by IRS |
Score -5 |
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| 2 |
Check if your employer matches employee contributions to the 401k plan? (Go to Question 6 if there is no employer match.) |
Score 10
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Reason: Employers are not required to match employee contributions. But the best 401k plans do match. Employer matching features are key to assessing the quality of a 401k plan. It is much more difficult for workers to accumulate adequate retirement savings with a 401k plan that lacks an employer match. For example, a 30 year-old earning $50,000, contributing 8% (with a 50% employer match-up to 6%) and earning an 8% annual return will have 38% more in etirement savings at age 65 than the same employee with no employer match.
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| 3 |
What is the level of your 401k plan's employer match? (If your exact matching level is not shown, check the closest answer.) |
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Reason: The most common matching level, according to Hewitt Associates, is $0.50 employer for each $1.00 employee contribution, up to a maximum of 6% of pay. Think of the employer match as an immediate, risk-free return on your investment (ROI). Regardless of the level of your plan's match, you should always contribute enough to get the maximum possible match. The higher the maximum employer matching contribution, the greater the opportunity you have to leverage contributions and build a retirement nest egg. According to the Profit Sharing/401k Council of America, the average employer match is 3%. Less than 5% of plans match more than 6% of compensation.
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Less than $0.50 match per $1.00 employee match up to the first 6% of pay |
Score 2 |
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$0.50 match per $1.00 employee match up to the first 6% of pay (most common) |
Score 5 |
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$1.00 match per $1.00 employee contribution up to the first 3% of pay |
Score 5 |
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More than $1.00 match per $1.00 employee contribution up to thefirst 3% of pay |
Score 10 |
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| 4 |
Check if employer matching contributions are made with
company stock? |
Score -5
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Reason: It is far better to receive employer matching funds in cash that can be immediately invested as you choose. Some companies, however, provide matches in the form of company stock. This retricts portfolio diversification.
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| 5 |
How long does it take to become 100% vested in your 401k plan? |
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Reason: Plans that offer employer matches often do not let employees who leave their job keep all of the matching funds unless they have worked a minimum period of time. (Your own contributions are always 100% vested.) An employer match that vests over 5 years will generally vest 20% every year. What this means is if your employer contributes any money to your account (match) during the first year and you left your job before the year was over, you would be 0% vested and would not get to keep their matching contribution. If you stayed on one full year you would then be vested 20% and would able to keep only 20% of the match that your employer had given you. The following year you would vest to 40% which means you would get to keep 40% of all the monies they had matched you over the years, and so on. Vesting schedules are all set up differently as well, but the most common vesting schedule is 100% over 5 years, or 20% per year. Immediate vesting is best from the plan participants' standpoint.
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Immediate vesting |
Score 10 |
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Less than 1 year |
Score 7 |
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1 to 3 years |
Score 5 |
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3 to 6 years |
Score 2 |
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| Investments |
| 6 |
Check if your 401k plan does not allow you to direct the investment of all funds held in your account (i.e. both your own contributions and your employer match). |
Score -5
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Reason: A 401k plan may give participants the choice of investment options for the employee contributions, the employer matching contributions, or both, or the plan may specify the investments without providing a choice to the employee. Today, most plans treat the the investment of employee and employer funds the same way; however, some plans still allow employees to choose how to invest their own funds, but provide no choice in the investment of employer matching funds.
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| 7 |
Does your 401k investment menu include low-cost, broad-market index funds for stocks, bonds and international investments options from one or more large and reputable mutual fund firms (e.g. Vanguard, Fidelity, Charles Schwab, T. Rowe Price, etc.). |
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Reason: Prudent investing in index funds is almost always the most cost-effective long-term strategy for 401k participants. Large, well-run index funds from reputable mutual fund firms have very low expenses so that the money you and your employer contribute goes to work for your retirement instead of going for high fees and costs associated with so-called "actively managed" funds. Mounds of academic research show that over the long-run, index funds outperform actively managed funds. If your 401k plan doesn't offer quality index fund options, it is a serious shortcoming.
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Yes |
Score 10 |
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No |
Score -10 |
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| 8 |
Does your 401k investment menu include a selection of low-fee "target date" or "life cycle" funds that automatically rebalance investments between asset categories (stocks, bonds, etc.) as participants age. |
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Yes |
Score 10 |
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No |
Score -10 |
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| 9 |
Check if your plan requires or encourages investment of 401k funds in the company's own stock? |
Score -5
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Reason: In the past, many 401k plans encouraged or even required account balances to be invested incompany stock. The use of employer stock as an investment has become less prevalent due largely to highly publicized cases like Enron where thousands of employees lost their 401k savings due to overexposure to company stock. Most plans today do not allow company stock as an investment option. Under the Pension Protection Act (PPA) of 2006, all 401k participants have the right to diversify out of employer contributions made in company stock after three years of service.
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| 10 |
Approximately how many investment options does your 401k plan provide? |
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Reason: Having a large selection to choose from is usually considered a good thing. But with 401k investment choices there can be too much of a good thing. Too many options can overwhelm participants, mask management fees and, even lead to inappropriate investment choices. We believe 12 or fewer investment choices are all that is needed for a well-rounded plan.
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Less than 12 investment choices |
Score 5 |
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12 - 20 investment choices |
Score 3 |
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More than 20 investment choices |
Score 2 |
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| Fees |
| 11 |
Check if your plan periodically provides understandable information about the investment management and administrative fees you are paying as a 401k participant? |
Score 10
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Reason: There is growing outcry over the hard-to-understand and often excessive fees associated with 401k plans. Legislation to standardize and improve fee disclosure is in the works. Forward-looking 401k plans are addressing the issue early.
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| 12 |
Check if your plan provides information on both the gross and net investment performance of your 401k. |
Score 10
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Reason: The difference between gross and net returns is equal to the total costs for any period. By disclosing gross and net returns, with a breakdown between investment and administrative costs causing the gap between the two, plan participants quickly compare the costs for the given services.
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| 13 |
What arrangement is used to provide services under your plan (i.e., are all of the services or investment alternatives provided by a single provider)? |
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Reason: If the services and investment alternatives under your plan are offered through a bundled program, then some or all of the costs of plan services may not be separately charged to the plan or to your employer. For example, these costs may be subsidized by the asset-based fees charged on investments. Bundled service arrangements may or may not be cost-effective; but, they make it quite difficult for plan participants to discern true costs.
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Services/fees are bundled |
Score 2 |
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Service/fees are separately priced |
Score 5 |
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| 14 |
Do any of the investment options under your plan include sales charges (such as front or backend loads, deferred sales charges or redemption fees)?
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Score -5
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Reason: There are plenty of excellent no-load funds available in every category of investments. If you plan includes investment funds with sales charges or loads, you're likely paying that are higher than they should be.
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| Administration |
| 15 |
Check if your plan automatically enrolls new employees in the 401k plan (unless they specifically opt not to enroll)? |
Score 5
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Reason: Automatic enrollment is a relatively new 401k feature intended to increase 401k participation particularly among younger workers and other groups who may not recognize the importance of retirement savings. Research shows that for participants with incomes under $30,000, 401k participation increases from 44% to 86% with automatic enrollment. For
participants age 25-34, participation increases from 56%
to 86%.
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| 16 |
Check if your plan automatically increases participants deferrals over time (unless they specifically opt not to)? |
Score 5
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Reason: Progressive plans automatically help participants save for retirement by allocating a slice of pay raises to the 401k plan. This is known as "auto escalation". Employees retain the right to say no, but allowing automatic 401k contribution increases is a powerful way to increase retirement savings.
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| 17 |
Check if your 401k plan provides online account reporting and investment trading that allow you to easily monitor performance and rebalance investments. |
Score 5
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| 18 |
Check if your 401k plan provides online plan documents and forms. |
Score 5
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| 19 |
Check if your 401k plan provides online retirement education services and tools. |
Score 5
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| 20 |
Check if your plan readily allows you to borrow from you 401k plan for non-emergency purposes like to buy a new car, etc. |
Score -2
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Reason: 401(k) plans are permitted to (but not required to) offer loans to participants. The loans must charge a reasonable rate of interest and be adequately secured. The plan must include a procedure for applying for the loans and the plan's policy for granting them. Loan amounts are limited to the lesser of 50% of your account balance or $50,000 and must be repaid within 5 years, or 15 years for residential loans.
Having the ability to borrow from your 401k may seem like a nice perk, but, in reality, it is a sure-fire way to decimate retirement savings. 401k's have become the replacement for traditional pension plans. These plans did not allow participants to touch their retirement saviongs and neither should 401k's.
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Results:
Under 50 points:
Your 401k has many shortcomings. Consider diverting a portion of your retirement savings to an IRA which you will have greater control over.
50-70 points:
Your 401k appears to be middle of the road.
71-90 points:
Your 401k is above average.
Over 90 points:
You are lucky to have a very strong 401k plan.
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Total:
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This area for notes
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