Thursday, July 12, 2012
What's a 401k?
What's a 401k??? You're a computer engineer, or a nurse, or a graphic designer. Just keeping current in your own specialty is an effort. So what happens to your 401(k) retirement plan while you're off doing what you do? Does it just languish, forgotten, in some dusty corner of your mind? Are you, among millions of others, crossing your fingers and hoping your portfolio will provide? Thanks to changes in the industry, investors now can get more help managing their 401(k) accounts. In the past, to prevent conflicts of interest, defined contribution plan providers could make only general asset class recommendations. But regulations now allow financial service companies to hire independent, third-party financial advisers like Ibbotson Associates to manage individual investors' 401(k) accounts. Those who choose professional help will find that the money in their portfolio will be allocated appropriately to funds in their existing plan, rebalanced regularly and adjusted over time to meet changing life circumstances. And these programs are catching on. Ibbotson is the independent third-party advisor for 401(k) managed account programs run by AIG VALIC, Fidelity, Great-West Retirement Services, Merrill Lynch, the Principal Financial Group and TIAA-CREF. Although 401(k) managed accounts are only two years old, participation in such programs is increasing rapidly. Currently there is over $10 billion in 401(k) managed account programs, and that number is expected to reach $300 billion in 2010, according to industry research firm TowerGroup. A major reason for the growth is that many employees don't know how to manage their retirement plans. Human resources firm Hewitt Associates found that only 16 percent of 401(k) plan participants made any changes to their accounts in 2004. The study also found that, while some employees were not aggressive enough with their investments, others took on too much risk. For example, participants concentrated about 27 percent of their 401(k) assets in their company stock.