Financial Planning Blog

As mentioned in Part 1, the 401K plan has come under attack in recent years for failing to adequately prepare American workers for retirement. Excessive fees that drag down the value of participants' accounts have come under increasing scrutiny, and for good reason. Despite of all the attention, the problem of expensive, poorly constructed 401K plans still exists, and many workers are stuck with plans that are less than optimal.

Before complaining too much, however, it is useful to remember the numerous potential benefits to utilizing your employer's 401K plan.

• The employer match: This is where your employer matches your contributions up to a certain point. For example, a common employer match would be 100% of the first 3% of contributions, and 50% of the next 2%, for a total of 4%. When your employer is handing out free money, you generally want to be first in line--even if it is money you won't generally spend until retirement.
• The tax benefits: By making a salary deferral into your 401K account, you lower the income taxes you pay today-delaying the taxation of this income for many years. Better yet, the earnings on these invested assets are also not taxed until withdrawn from the plan, presumably many years down the road.
• Automatic savings: Let's face it, most of us are more successful at saving when the money comes directly out of our check before we get a chance to spend it. The automatic deductions of a 401K plan create a dollar cost averaging discipline that works to our advantage during up and down markets.
• Pre-defined investment choices: Many people don't have time or the inclination to learn much about investing, and to invest on their own is too intimidating. However, with employer provided education and investment advice, matched with a 401K plan with a reasonable set decent fund choices, these novice investors can do pretty well.
• Low cost: Yes, many 401K plans have excellent low cost investment options-less expensive than individual investors would find in the retail investment marketplace.
• Simplicity: Many, if not most, 401K plans are simpler to manage than mutual fund or brokerage accounts. You can generally go on-line, change your investment percentages, click and go. And now, many 401K offer automatic rebalancing of accounts, so you have no excuse to not to follow through with this important discipline every 6 to 12 months.

Although some 401K plans are pretty awful, especially those provided by small businesses, many are fortunate to have excellent 401K plans. It is now up to these folks to make the best use of a great tool. Curious about how local Idaho company retirement plans match up, we used the BrightScope website to check out their 401K plans ratings. BrightScope uses over 200 data points to rate plans on a 100 point scale, and then compares plans to others in their peer group (e.g. companies with similar numbers or participants, assets, industry, etc). Here's how some local companies fared:

• Hewlett Packard: Score=81, in top 15% of peer group
• Micron: Score=75, in top 15% of peer group
• Supervalu: Score=61, in top 15% of peer group (amazingly)
• Idacorp: Score=73
• Washington Group Intl: Score=77
• URS Corp: Score=69
• J.R. Simplot: Score=68
• Intermountain Gas: Score=63

What can you do if, after closer inspection, your company 401K plan is not as advantageous as you first thought? We'll tackle this question in Part 4.