By LESLIE SCISM and JENNIFER LEVITZ
Summer's almost over, and time is running out to accomplish the goals you set as 2008 began. For many, that probably includes building up your nest egg, so this month's quiz tests your knowledge of 401(k) retirement-savings programs, the primary savings vehicle for many Americans. Here we quiz you on the latest developments.
1) First, let's review some history. Which is true of the birth of the 401(k)?
A. In the 1970s, some corporations asked the government if they could put aside retirement money, tax-free, for their executives. Officials gave permission, provided the companies offered the opportunity to all workers, never expecting the plans to take off.
B. Reacting to a decline in the number of traditional pension plans, public-policy experts roughly 25 years ago proposed the 401(k) as an affordable alternative for employers.
C. It was proposed by think tanks as a way to experiment with a future privatization of Social Security.
ANSWER: A. The 401(k) plan slipped in "under the radar," says Teresa Ghilarducci, an economist at the New School for Social Research in New York. The idea was that this new plan -- in which workers set aside pretax earnings in investment accounts -- would supplement the rank-and-file's old-fashioned pension plan, the type that sends out a monthly check.
But as companies sought to hold down costs, more and more froze the old-fashioned plan and went solely with a 401(k). "What [the government] didn't anticipate was the erosion of defined-benefit plans," she says. "They never conceived that the 401(k) would be the only retirement plan that companies provided. That's what we economists call 'unintended consequences' of a law."
2) True or false: Companies require that retiring employees "roll over" their 401(k) assets into an individual retirement account.
ANSWER: False. As baby boomers head into retirement, mutual-fund firms have begun a marketing blitz to encourage people to move their workplace savings into IRAs they run. But funds in 401(k) plans often have lower fees than investors could get on their own, according to Cerulli Associates, a Boston consulting firm, because big employers can negotiate institutional-fee structures. So many retirees may be well-served in leaving the money where it is.
And many employers are starting to better accommodate retiring 401(k) participants: For instance, some 40% of large companies offer an income annuity as a payout option, and 60% allow systematic withdrawals.
Of course, many investors may want to consolidate their accounts in one place and gain access to a wider array of funds through an IRA.
3) The 2006 Pension Protection Act included measures to improve 401(k)s. Which does the law not do?
A. Encourage employers to provide investment-advice programs.
B. Set the minimum employer match at 25 cents per $1 of a worker's first 3% of pay.
C. Encourage employers to enroll workers automatically, unless they specifically opt out.
D. Encourage diversified investments as the default selection for those failing to choose.
ANSWER: B. There is no required match, though few employers go through the record-keeping hassle of running a 401(k) if they don't intend to contribute money.
For plans with fixed matches, the most common is 50 cents per $1 up to 6% of pay, with 32% of plans going this route, according to the Profit Sharing/401k Council of America, a Chicago nonprofit. The next most common: $1 per $1 of the first 4%, at 10% of plans.
4) When employers automatically enroll workers, what percentage of the employee's pay is typically contributed to the 401(k) account?
A. 2%
B. 3%
C. 4%
D. 5%
ANSWER: B, says Hewitt Associates, a Lincolnshire, Ill., consulting firm. Fifty-one percent of plans use a 3% default contribution rate, while 14% use a 4% rate, 11% use 5%, and 15% use 2%.
Almost three out of 10 employers use contribution escalation -- the boosting of the percentage of an employee's pay that is directed into the 401(k) -- in conjunction with automatic enrollment. Many aim to boost contributions over time to 8% to 15% of pay.
5) True or false: Participation in 401(k) plans has increased significantly as a result of the automatic-enrollment feature of the Pension Protection Act.
ANSWER: False, according to Hewitt. The percentage of employers who automatically enroll participants has almost doubled since 2005, to 34% -- but given that "most plan sponsors implement automatic enrollment only for new hires, participation increases will occur gradually," Hewitt concludes. On average, 78% of eligible employees participate in their companies' 401(k) plans, up marginally from 2005.
6) True or false: Continuing a downward trend, fewer than one in four employers match contributions in company stock.
ANSWER: True. Of plans offering employer stock as an investment option, 23% match contributions exclusively with the stock, down from 36% in 2005, according to Hewitt. The decline picked up steam with the collapse of Enron Corp. in 2001, which financially ruined many of its stock-owning retirees.
7) Which feature did Hewitt find more commonly available in 2007?
A. Automatic rebalancing of participants' accounts based on their allocation mixes.
B. Automatic contribution escalation so workers don't have to remember to do this.
[Image]
Serge Bloch
ANSWER: A, at 42% of surveyed plans. This feature addresses a common problem among investors: While some move money around too aggressively, buying high and selling low as the market gyrates, others focus too little on their accounts. Among plans that rebalance participants' account balances, 54% let the participant choose the rebalancing frequency while 23% rebalance quarterly. Automatic contribution escalation is offered at 35% of plans.
8) True or false: All target-date funds rigidly follow the same formula in terms of the stock-and-bond splits they offer over time.
ANSWER: False. These funds' stock-and-bond mixes become more conservative as a worker nears retirement age. But "products with very similar names can have very different compositions," says Robyn Credico, a national director of retirement plans at Watson Wyatt Worldwide, a management-consulting firm in Arlington, Va., in a May report.
An analysis by the firm of target-date funds from a range of mutual-fund companies found that allocations to stocks for employees 10 years from retirement age varied from 40% of a fund's assets to 80%. For employees about to retire, stock allocations ranged from 20% to 65%. The data in the report is based on 22 different fund providers, each having about five to 10 funds.
9) Among investment options, U.S. large-cap stocks are most commonly offered across plans. What category comes next?
A. Target-date funds
B. Intermediate bonds
C. Small stocks
D. International stocks
ANSWER: D. U.S. large-cap stocks are offered in 98% of plans, followed by international stocks, in 97%, Hewitt says. Small-cap stocks, in 89% of plans, and intermediate bonds, in 88%, are third and fourth most common options.
10) What percentage of plans allow immediate vesting for matching contributions?
A. 9.5%
B. 19.5%
C. 29.5%
D. 39.5%
ANSWER: D, according to the Profit Sharing/401k Council.
Write to Leslie Scism at leslie.scism@wsj.com and Jennifer Levitz at jennifer.levitz@wsj.com
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