Change is afoot all over America. There's a new administration in Washington, and big crises on Wall Street that are requiring new policies and plans. There's much attention being paid to how we can improve many aspects of our American lives.
One topic being examined is our retirement system. In late February, Paul Schott Stevens, top dog at the Investment Company Institute, the trade organization for mutual funds, spoke before the House Education and Labor Committee, offering some ideas on how to improve 401(k)s and strengthen retirement security. I liked much, but not all, of what he suggested.
On the positive side, I liked his suggestion to make automatic enrollment in 401(k)s mandatory. It's been growing in popularity already, and makes a lot of sense, given our seemingly innate tendency to put off tasks like enrolling. But I would also like to see the default contribution rate for automatic enrollees be sizable, such as 10% of salary. If that proves too much, the employee can change it. Otherwise, too many people are leaving their contribution rates at too-low default rates. A Hewitt Associates study a few years back found that while 90% of automatically enrolled employees participated in 401(k) plans versus only 68% of non-automatic employees, the former group contributed a lot less, due to default rates often being 3% or less.
Always diversify
Stevens noted that in 2007, when company plans permitted employees to invest in company stock, "nearly 8% of participants had more than 80% of their account balances invested in company stock." Yikes! Look what would have happened to you if you retired at the end of 2008 and were invested in any single one of the following companies:
|
Company |
2008 return |
|---|---|
|
Dow Chemical (NYSE:DOW) |
(59%) |
|
General Electric (NYSE:GE) |
(54%) |
|
American Express (NYSE:AXP) |
(64%) |
|
Nokia (NYSE:NOK) |
(58%) |
|
Motorola (NYSE:MOT) |
(72%) |
|
Deere (NYSE:DE) |
(58%) |
|
eBay (NASDAQ:EBAY) |
(58%) |
Data: Yahoo! Finance.
He recommended helping employers "diversify participants out of heavy concentrations of company stock as they approach retirement." I'd change that to support diversifying holdings at every age. Even if you're 20, you shouldn't have most of your eggs in just one basket.
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