401(k) plan trends to watch in 2012

DES MOINES, Iowa (AP) — This year will bring about a number of changes in 401(k) plans. Some are driven by consumers demanding better investment choices, lower fees, and help to improve the performance of their portfolios. Others are mandated by the government in an effort to protect workers as they strive to save enough for retirement.

Here’s a look at 9 major developments to watch in the year ahead:

1) Higher contribution limits

The maximum annual 401(k) contribution increases to $17,000 this year. That’s up $500 from the $16,500 maximum in effect since 2009. Additional catch-up contributions for those age 50 or older remains at $5,500 a year.

2) Improved fee disclosure

New Labor Department regulations require 401(k) plan providers, such as Vanguard, ING, and Aon Hewitt, to issue greater fee disclosures to the employers using their plans. A clearer picture of the costs associated with a 401(k) plan will enable companies to comparison shop more effectively and get the best plan for their workers. A second regulation goes into effect in May requiring additional fee disclosures to 401(k) account holders. That step will help workers understand how much they’re paying for their 401(k), and enable them to better use costs in selecting their investments.

This first step may only push workers to request more. The new regulations aren’t perfect in that they don’t require all fees to be disclosed, and fall short of offering simple comparisons to average fees or other benchmarks. However, some plan providers are disclosing more than what’s required.

3) Declining fees

The heightened focus on fees in the last few years has sparked the highly competitive mutual fund industry to lower costs. Average fees and expenses for stock mutual funds fell to 0.95 percent in 2010 from 1.28 percent in 2000, says the Investment Company Institute, a trade group. Expenses for bond funds fell to 0.72 percent from 1 percent in 2000.

The lower cost trend is expected to continue. Many 401(k) providers, including Vanguard have offered low-cost funds for years. With greater fee transparency, it will become clear which 401(k) providers are charging the most, and that will likely lead employers and workers to exert pressure to keep costs low.

4) More ways to get advice

Retirement plan administrators are newly able to offer advice to accountholders, provided they don’t have any stake in the recommendations. That means the advice must be based on an unbiased computer model, or that the adviser doesn’t have any financial interest in the specific investments.

More employers are recognizing that their workers need help and are adding more advice options. Even so, about 70 percent of workers don’t get help. That’s troubling because workers who received some form of help enjoyed average annual returns that were 3 percent better than workers handling their own accounts, according to benefits consulting firm Aon Hewitt.

5) More companies restoring 401(k) matches

Most companies offering a 401(k) plan help workers save by matching a portion of the employees’ contributions. A common match is 50 cents for each dollar put into an account, up to 6 percent of pay.

About 20 percent of companies with 1,000 or more workers suspended their 401(k) match during the recession. Some 75 percent of those employers have since resumed matching contributions, business consultant Towers Watson said. As the economy continues to improve more companies are expected to at least partially restore their match.

6) Larger number of ETFs and index-fund selections

Expect more 401(k) plans to offer a greater number of index mutual funds, exchange traded funds and other lower cost funds that are not actively managed. Index funds are designed to track established market indexes such as the Standard & Poor’s 500. They’re increasingly popular because, on average, their fees can be nearly half those of actively managed mutual funds. Schwab Retirement Plan Services Inc. announced last week a new all-index 401(k) plan.

ETFs are also gaining in popularity. They track various indexes, but are bought and sold throughout the day like stocks. ETF fees are often three to four times lower than actively managed funds. The Vanguard Group, ING Direct, and T.D. Ameritrade are among providers offering ETFs in 401(k) plans. Schwab recently announced plans to roll out its version of a 401(k) with ETFs this year.

7) Automatic features will rise

Automatic enrollment gets more workers to save for retirement. Auto enrollment is the practice of enrolling workers into a plan when they’re hired unless they choose to opt out of participating. One example: TIAA-CREF, the leading provider of retirement services in the academic, research, and medical fields, said in a November study that the use of auto-enrollment in its employee 401(k) program boosted participation from 63 percent to 95 percent. Also expect increased use of auto escalation, the practice of automatically boosting the percentage of pay a worker sets aside in the 401(k) plan.

8) Options for generating income will grow

Baby boomers are retiring at a rapid clip and the biggest issue on their minds is how to create a pension-like income from the 401(k) savings. Employers are adopting ways workers can convert some of their savings into an income stream that help keep up with inflation while minimizing risk. Several companies have introduced programs that include various combinations of stock and bond investments with options to buy an annuity. Hartford Financial Services Group and ING’s U.S. retirement division are among the companies unveiling new plans in recent months.

9) Number of multiple employer plans will climb

An open multiple employer plan, allows several small and medium sized businesses to hire one administrator oversee their 401(k) plans. This removes the responsibility of each company to maintain plan documents, arrange audits, monitor plan investments, and hire service providers. Shifting this responsibility reduces each company’s liability and holds down costs. This idea is drawing increasing interest and will grow in popularity because workers in small businesses are more unlikely to have a retirement plan available.

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