401(k)s: Recent changes not nearly good enough

Fixing the many faults of the 401(k) got plenty of attention in Washington this year, but no action. I know, I know, the wheels of reform turn slowly. But let's just hope they keep turning. What has me concerned is that Congress might backburner the need for 401(k) reform given recent developments. Fidelity reported that the average 401(k) balance gained 28% in the second and third quarters of this year. That's good news for investors in the short term, but potentially bad news if it causes Washington to lose its sense of urgency to fix the structural flaws that abound in the world of 401(k)s.

I'm also hoping Washington doesn't read too much into the latest report on how Corporate America is tinkering with its 401(k) plans. According to Hewitt Associates' 2009 survey of large company 401(k) plans employers have definitely made progress fixing some of what is broken:

• 58 percent of companies now offer auto-enrollment, up from 34 percent two years ago.

• 44 percent of plans automatically increase employee contribution rates, compared to 35 percent in 2007.

• 5 percent of plans use a money market or stable value fund as the default investment for automatic enrollment, down from 17 percent in 2007.

• 17 percent of companies make their full match in company stock; down from 23 percent two years ago, and 35 percent in 2005.

• The most common matching formula (reported by 27 percent of plans) is dollar for dollar up to a fixed percentage of salary; typically 6 percent. In years past the most common formula was a less-generous 50 cents per $1. (23 percent of plans.)

Progress? Sure. But not nearly enough.

What Plan Sponsors Still Get So Horribly Wrong
More from the Hewitt survey:

• 35 percent set their default contribution rate at 4 percent or higher. That means 65 percent of surveyed corporations are setting up employees to fail with a 401(k) default contribution rate below 4 percent. There's no way your nest egg grows sufficiently at such a low contribution rate.

• 56 percent do not automatically increase the contribution rate. So let's connect the dots: 65 percent set too low a default contribution rate and it's not as if they are likely to have a plan for automatically increasing the rate.

• 41 percent do not rank investment fees and expense ratios as "one of the most important factors in selecting investment options for their 401(k). Paging Jack Bogle.

• 52 percent allow new employees to start contributing to the plan immediately. Hello? That means nearly half of employees are frozen out of their plan for an initial period? Exactly how does this encourage Americans to save more for retirement? To be clear, we're not talking about qualifying for the company match (44 percent have a service requirement for the match) but simply the right to start contributing to your 401(k) from day one of employment. That's just more salt in the wound for the unemployed: even when they get a new job there's a near 50-50 chance they will have to wait a period of time before they can begin saving for retirement through their company plan. What a disastrous disconnect: We are being told we need to save more for retirement, yet half of employers freeze out new employees from immediately participating in the company plan. Nor is the IRA a decent alternative; the maximum IRA limit is less than one-third the annual contribution limit for a 401(k).

I am all for forward motion, but it's clear that corporations are still not getting it completely right, or right fast enough. Besides, business can't be expected to fix systemic problems in the structure and implementation of 401(k)s. That's a task for Washington.

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