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Rocky Mountain News 
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URL: http://www.rockymountainnews.com/drmn/business/article/0,1299,DRMN_4_3430781,00.html 

401(k)s require care and planning

Saving enough and investing carefully are key elements

By James Paton, Rocky Mountain News
December 29, 2004

With the traditional pension plan in doubt, more workers must depend on themselves, not their companies, to fund their retirements.

The question now: Are they prepared for the challenge?

People taking charge of their nest eggs with 401(k) retirement plans tend to save too little, start too late and make poor decisions, such as putting heaps of money in their companies' stocks - remember Enron? - or being too aggressive.

Many investors also are in the dark about the fees they pay for the savings plans.

All of that has stoked worries that current workers may not live as comfortably as they hope when they finally leave the work force and retire.

"I can tell you, people don't have enough saved," said Anne Delle Donne, a financial planner with MJ Smith & Associates in Douglas County. "I've got a 60-year-old who has only $50,000, $60,000 in his 401(k), and he's retiring in five years. This is it."

Times have changed.

Just ask Nelson Phelps, who oversees a U S West retiree group in Denver. Phelps joined Mountain States Telephone and Telegraph in 1966. That company later became a part of U S West, which was acquired by Denver-based Qwest Communications in 2000.

"There was a day when you knew you'd be taken care of," said Phelps, who retired from U S West in 1990.

"That's one of the reasons I went to work for the company," he said. "But the newer breed of employees isn't going to have that anymore."

More than 42 million Americans now have a total of nearly $1.9 trillion invested in 401(k) plans, according to a study by the Employee Benefits Research Institute and the Investment Company Institute.

By contrast, 22.4 million Americans had 401(k) plans in 1992.

The defined-benefit pension - the fixed monthly payments based on years of service and pay level - was once a plan on which most people could rely.

Yet in recent years it has faded fast. While many older workers and retirees like Phelps have both a 401(k) and a pension, younger generations probably will have to accept life without those secure monthly checks.

All new workers for companies such as IBM and Avaya, for instance, will be offered a 401(k) instead of a pension under recent changes.

Phelps understands the value of an old-fashioned pension, but he is quick to note that the 401(k) system delivers flexibility to workers who want to hop around to better job opportunities as well as potentially big payoffs to those who save prudently.

"I don't think it's all bad, quite frankly," said Phelps, whose group keeps an eye on Qwest's pension. Phelps has worried about the way Qwest handled its pension fund, which had gone from a big surplus to a deficit but is now fully funded.

Education efforts also raise awareness about retirement planning, and some companies are giving employees the option of turning over the tough investment decisions to professional money managers.

How much is enough?

Many companies see the pension fund as a burden, worried about having the assets to meet their obligations as the ranks of retirees swell. Steep stock market declines and low interest rates left huge numbers of plans underfunded.

The 401(k) has risen as a more attractive and predictable, and often less costly, alternative.

"Pension plans are almost a dinosaur," said Mark Brown of Denver- based financial planning firm Brown & Tedstrom.

Rolled out in the early 1980s, 401(k) plans, named for a section of the tax code, allow employees to take control of the wheel and receive tax advantages. Typically, an employer contributes to the plan as well, but does not bear the risk.

It also seems to be what employees want. Traditional pension plans were seen as an incentive to stay at a company, but these days, people tend to leap from job to job, making a 401(k) more enticing.

One worry, though, is that investors aren't socking enough away.

The numbers back up the concerns. Personal saving as a percentage of disposable income was 0.2 percent in October, down from 0.3 percent the prior month. It was the lowest rate since October 2001.

Statistics and anecdotal evidence suggest many individuals also are betting too heavily on their own companies' stocks.

The Employee Benefit Research Institute's study found 53 percent of 401(k) accounts have more than 10 percent of their assets in company stock, while more than 10 percent of accounts had more than 90 percent of their assets in company stock.

In addition, people in some plans may face relatively high fees.

Fees typically range from 0.5 percent to 2 percent of the assets invested in the plan. But experts said average investors, and many employers, too, are unaware because they aren't disclosed prominently.

It may come as no surprise, but retirees polled by Putnam Investments said they wished they had done more to prepare. About 60 percent of retirees said they should have started saving earlier.

"The most important finding of the study is that advice to save early and save more has not been heeded by the vast majority of retirees," Richard Geist, clinical instructor in the Department of Psychiatry at the Harvard Medical School and president of the Institute of Psychology and Investing, said in the report.

"As a result, we need to develop new, creative ways to help younger workers talk about and learn about money in a manner that leads to maximizing their long-term financial strategies," said Geist, who was a consultant on the report.

Many people also fail to anticipate how much they'll need to live comfortably and set aside far too little or - on the other end of the spectrum - they are too frugal.

A traditional pension is steady. There is no worry that people will outlive their money.

With a 401(k), the golden years are far more uncertain.

"People don't know how long they are going to live," said Don Fuerst, a principal at Mercer Human Resource Consulting in Denver.

"If you live a long and healthy life, it's too bad," he added. "You may run out of money. If you die earlier, you could have saved too much."

or 303-892-2544

Copyright 2004, Rocky Mountain News. All Rights Reserved.




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