The ‘Super 401(k)’
Tired of the same old 401(k)? How about a Super 401(k)?
Some companies have started offering a new defined contribution retirement plan to employees. Here’s how it works. In return to ceding control over how your contributions get invested, you gain a turbocharged contribution from your employer. As this article from Business Week points out, these plans are hybrid of a traditional 401(k) and a pension.
And the increased employer contributions can be substantial - think 15% to 20% of your yearly salary. That’s in addition to the more standard 6% match on your contributions.
So what’s not to love? Well, like the man says, there’s no such thing as a free lunch. In return for the increased match, you turn over control of how the plan (and your money) is invested. Typically, the employer will select a so-called lifestyle or target date fund. Such a fund matches your projected retirement date to an appropriate asset allocation. I personally like target date funds and recommend them to people without much interest in investing. In this case, you’d be turning over control of the investment, but it would like be invested how you would have done it anyway.
That isn’t so bad until you consider the down side of the equation. If how the employer invests the money isn’t so smart and you don’t have enough to retire at your projected retirement age, tough luck. You keep working.
I’m not so sure you’ll see a lot of this in the future. I don’t think turning over control of their money would appeal to a great many people. Besides that, there’s the legal risk. You can sign all the papers you want, but if your company takes your retirement money and invests it inappropriately, I tend to think you’d have legal recourse.
December 11th, 2007 at 10:31 am
I don’t understand this at all. Why would employers want to require employees to use target date funds? Why do they care?
I thought the whole point of 401k plans over defined benefit plans was that employers got out of the business of managing their employees’ investments.
The article offers a couple ideas for why an employer would do this (attrack younger talent), but that seems pretty flimsy.
December 11th, 2007 at 10:35 am
Hmm, it makes a little more sense after rereading part of the article. The business in question appears to be replacing an existing guaranteed benefit plan with this plan.
In other words, they may want to ensure that the investments are conservative, because if the 401k balance is below a certain level at retirement they’re responsible for making up the difference.
My company has a program kind of like this. Some percentage of our salary is contributed to a ‘profit sharing’ program. At retirement time, for qualified employees, if the profit sharing balance is less than some percentage of your salary the company will contribute the difference. Kind of a lightweight pension.
December 11th, 2007 at 11:55 am
Hmm. I think target funds are probably the second best way of investing (the best involves a few good indexes). So if my employer offered one of these with an excellent match, I might take it.
As long as they were investing it in target funds–I’d want to keep abreast of that, just so I could say “Ok, no more” if they switched to something really dumb.