Retirement: Are 401(k)s Making a Comeback?

What do Ford Motor Co., FedEx, Eastman Kodak, and AARP have in common? They all started 2010 by giving back what they had taken away: matching contributions to their employees' 401(k) retirement accounts. In the economic turmoil of 2008 and 2009, roughly 18 percent of companies either eliminated or reduced the contributions they were making to their employee accounts, according to a study by Profit Sharing/401k Council of America, a nonprofit group backed by employers and providers of retirement plans.

Now 5.4 percent of those companies have already restored their matches and 41.3 percent more say they'll reinstate matching contributions in the first quarter of 2010. "Even in this economic period, plan sponsors remain committed to improving their plans," says David Wray, president of PSCA. (The Pension Rights Center maintains a comprehensive list of companies and their latest policies.)

While the 401(k) is rebounding, it may never return to being the retirement standby we remember. Some 13 percent of the companies reinstating their matches are doing so at a lower level than they maintained before. FedEx, for example, is matching most of its employees' contributions at half the rate it previously paid. Seventeen percent of the businesses in the PSCA survey are reserving the right to vary the match annually on the basis of company profitability.

Employee participation fell off a cliff at companies when the matching payments stopped in 2008 and 2009. According to the PSCA survey, 73 percent of companies that suspended their matching contributions saw a decrease in plan participation as cash-strapped employees worried about throwing good money after bad. Companies have an incentive to keep workers in their programs: the 2008–09 market crash produced many complaints about the suitability of 401(k) plans as a national retirement-planning mechanism, and Washington policymakers have been talking about tightening standards on the plans or even replacing them altogether.

For example, the Department of Labor is putting the final touches on proposed rules governing how investment advice is provided to workers. President Obama asked for additional standards and protections for 401(k) investors in his State of the Union speech. And a new Senate bill introduced recently by Sens. Jeff Bingaman (D-N.M.), Johnny Isakson (R-Ga.), and Herb Kohl (D-Wis.) would require employers to inform plan participants of the projected monthly income they could expect at retirement based on their current account balance.

At the same time, employees are starting to get more competitive information about their 401(k) plans. One company, Brightscope, publishes ratings on thousands of company plans and includes competitive information about the specifics. Plan participants can go to that Web site and see how much more (or less) they would be able to save if their plan were better or worse. Another Web-based firm, Employee Fiduciary, publishes fee schedules for most of the major companies that provide 401(k) investments.

Some workers may find that their plans are less than optimal—perhaps they charge too much in hidden fees or offer unattractive investment options. Employees who are unhappy with their companies' offerings do have alternatives. They can contribute less (or not at all) to the company plan, especially if there isn't an employer match, and instead max out their contributions to their own individual retirement accounts or Roth IRAs. Because 401(k) plans have higher contribution limits than IRAs, these workers may want to max out their IRAs first and then also contribute smaller amounts to their 401(k), just to make sure they are saving as much as possible. In many cases, unsatisfied workers can also pull money out of their company 401(k) plan and roll it over directly into a personal IRA (tax-deferred and without fees), while they continue to work for the company. This is called an in-service non-hardship employee withdrawal.

Employees who are nearing retirement and find their 401(k) plan limited may well want to do this, says Neal Thompson, a Phoenix financial adviser: "So many times, it makes sense for some people as they approach retirement years to start moving that money out." One reason to withdraw money from a company plan is to have greater latitude in how it is invested. The typical plan now has 18 different fund choices for investments, according to the Profit Sharing group. But some companies have as few as six or seven and do not allow workers to invest in categories like small companies, emerging markets, or real estate, says Thompson. Other companies may offer those choices, but only with funds that are comparatively expensive or poorly performing.

In-service withdrawals may also make sense for workers who are concerned about estate planning. While employees do designate beneficiaries for 401(k) plans, an individual taking the money out could set up several different IRAs with different heirs named as beneficiaries. That's an arrangement that can also stretch out the tax-deferred status of those funds longer.

But not every company offers these withdrawals, and some companies allow the withdrawal but then punish the employee by limiting their future participation in the plan or cutting their match. That may make it not worth doing, says Thompson. Furthermore, most 401(k) programs do limit fees and offer free or inexpensive advice. That may not be the case when you roll over that money into private accounts, which sometimes charge higher advisory and management fees.

Employees who don't like their plans can also agitate at work for better options. "If they are really intrepid, they can contact their plan administrator [typically the company they work for]," says Brightscope's Mike Alfred. "Instead of just saying, 'I don't like it,' they can send their company to our site." Unsatisfied employees willing to do the footwork may be able to add another job to the one they already have: helping their HR department find a better plan. At the least, that should earn them a match.