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When employer makes 401(k) changes, doing nothing can cost you

By Kathy Chu
Dow Jones Newswires

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With accusations of improper trading mounting against mutual-fund companies, more employers are eliminating funds tainted by the probe and adding others to the lineup.

Wal-Mart, the nation's largest private employer, recently axed Putnam funds from its 401(k) plan. This follows on the heels of other corporations cutting ties to Janus Capital Group, a firm that's also entangled in the scandal.

The lowdown for employees is: You need to figure out whether your company is making changes, and if so, when the changes take effect and what will happen if you do nothing. And if you haven't done so already, this might be the opportune time to rebalance or sell overweight positions and buy into underweight ones.

"If nothing else, this is a good check to say, 'When is the last time I thought about my asset allocation?' " said Joe Hessenthaler, a principal at Towers Perrin, a human-resources consulting firm in New York.

Sounds like a simple task, but every year, 75 to 80 percent of investors let inertia get the best of them, making no changes to their 401(k) plans, according to the Profit Sharing/401(k) Council of America in Washington, D.C.

But it's not a good time for complacency, because by doing nothing, you may be hurting your bottom-line returns if your company is putting you into another option with higher expenses or one that doesn't fit into your overall investment strategy, said Robert Liberto, a vice president with Segal Advisors, an investment-consulting firm in New York.

The first thing to do is evaluate what changes, if any, are in the works for your retirement plan. Companies need to notify employees in some way, and this is usually done through e-mail or internal memos.

For instance, Wal-Mart told its 1.2 million employees in a memo that it was discontinuing the Putnam New Opportunities Fund and the Putnam International Growth Fund.

The company didn't say why the changes were being made. Nevertheless, the actions were comforting, said a 36-year-old Wal-Mart employee, because the retailer is "sending a pretty clear message that we're not going to put up with integrity issues and we don't want to do business with firms like that."

The employee, who declined to be named, had money in both Putnam funds that were dropped and had been planning to make changes. Yet because Wal-Mart is transferring money from the Putnam funds automatically into replacement options, it's saving him a little time and extra effort, he said.

In general, before you consider investing in the new option that your employer is bringing in, evaluate the fund's underlying investment mix.

One international fund might have 75 percent of assets in international stocks while another, similarly named fund, might only have 60 percent of assets in this sector.

This could mean that if your company is replacing an international fund, you might need to get more exposure to these stocks elsewhere in your portfolio.

Another step employees may need to take: getting back into the equity market.

Some companies, such as drug maker Merck, of Whitehouse Station, N.J., are eliminating certain equity investments and then transferring participants' balances into money-market accounts. This puts the onus on participants to reallocate the investments or risk not having them keep up with inflation.

"Having your money sitting in a money-market account for any length of time is going to diminish your plan returns," said David Wray, president of Profit Sharing/401(k) Council of America.

Copyright © 2003 The Seattle Times Company