Keep An Eye On Your 401(k) Plan And The People Who Run It

February 15, 1998 | By KENNETH R. GOSSELIN; Courant Staff Writer

For more than nine years, June Bavin contributed regularly to her 401(k) plan at Emergi-Lite in Westbrook, figuring she was building a nest egg for retirement.

Right after Christmas, Bavin found out that the egg had a big crack in it.

Bavin and her fellow employees at the manufacturer of highway emergency lights learned that their investment adviser, someone from outside the company, had squandered virtually the entire fund — $2 million or more — and that Emergi-Lite had not been monitoring the investments.

Experts say such occurrences are rare and most often happen at small companies rather than large ones, because plans with more than 100 employees require an audit that would pick up on poor fund performance.

But no matter what size company you work for, it is wise to keep tabs on your 401(k) and how it is performing, experts say.

The U.S. Department of Labor, the chief overseer of 401(k) plans, says there are four things you should expect from your plan: your best interests are served; plan expenses are kept reasonable; investments are diversified; and investments are made carefully and wisely.

With those things in mind, experts recommend taking the time to learn how your plan works, reading statements that are sent to you, and asking questions if you don’t understand something.

«A 401(k) is your money,» said Daniel Friedman, a partner at Wealth Management Group in Farmington, a tax and financial consultant to small companies with 401(k)s. «You should have control over where it is going.»

Gone are the days when companies exclusively offered the traditional pension plan, which guaranteed a specific retirement benefit based on years of service.

Today, the 401(k) has become popular because it offers the potential for larger payoffs. But one drawback is that the 401(k) shifts more responsibility to the employee for choosing different types of investments, such as stocks, bonds — both foreign and domestic — and money market funds.

So, where do you start? First, by asking questions, experts agree.

One way to not only learn about the plan, but also find out whether the rules are being followed is by getting a copy of the summary annual report, according to the Labor Department.

The report, available annually in bigger companies and every three years in smaller ones, may show any large losses, total administrative expenses and any loans made by the plan that have not been repaid on time, the department said.

The Labor Department noted, however, that the summary annual report is just that, a summary. You may want to examine the complete annual report and other statements, and the summary annual report will explain how to get a copy, the department said.

It also is crucial to understand who is involved in overseeing your plan, said Gloria Della, a Labor Department spokeswoman.

Typically, there are three primary responsibilities: trustee, plan administrator and investment manager. Della said it is not unusual for one person or entity to take on one or more of those responsibilities.

The department does not require companies to hire outside contractors to perform the duties because, especially in small companies, that can be expensive and stand as a roadblock to offering a 401(k), Della said.

Here’s an outline of the duties:

* The trustee — often the owner in a small business — is responsible for choosing what investment options will be offered, monitoring their performance and making sure the plan operates the right way.

* The plan administrator makes sure the plan meets regulatory and tax requirements and takes care of paperwork, essentially acting as the certified public accountant. Some companies hire a third-party administrator to handle those duties.

* The investment manager makes the decisions about the investments that the plan is holding.

Friedman advises being wary if the trustee, especially in smaller plans, is not a company official because the ultimate responsibility for monitoring the plan rests with the trustee.

«It’s a big warning sign,» Friedman said.

Friedman said employees should be able to meet once a year with the plan administrator or investment manager to ask questions.

Another link between you and your plan is provided through statements — generally mailed quarterly, and at least annually — that outline the performance of your investments.

There should be details about contributions from you and, if applicable, your employer; information about how your money is being allocated among the investment options; and telephone numbers to get more information, experts said.

Friedman said you should spend a half-hour with each statement.

«If you can’t understand it, that’s a problem,» Friedman said.