Eyeworld

OPHTHALMOLOGY BUSINESS 138 October 2016 by Roger Balser panies began to offer different types of investment choices, including the addition of mutual fund selec- tions. But again, the choices were very limited, and there really was no guidance or advice offered to early 401(k) participants. It took employees a longer time to catch on with the 401(k) plan. They were used to seeing a certain deduction in their paychecks for their defined benefit pension plan. Now they were asked to choose how much they wanted to defer and what investments they wanted for their retirement. It was a shock to their system. Another feature of the 401(k) plan was that pre-taxed dollars were deducted. As participants increased their savings, it also lowered their taxable income. The 401(k) offered a lot of benefits to a participant but still not a lot of features or guidance. Fast forward to today, where some 94% of private employers offer a 401(k) plan, which is incredible progress. In the past 30 years, the 401(k) has changed and companies began to customize their respective plans. Some added a lot of options to their plan menu. I have seen companies with more than 200 in- vestment options in their plan. Talk about options overload! Others did the opposite and subtracted options. It's very interesting that with all of this adding and subtracting, close to 80% of the people who enroll in a 401(k) at their workplace never change the way that their invested dollars are allocated. I've run into the scenario where a participant thought his 401(k) ac- count was growing, only to discover it was earning less than 1%. Most people really miss this. The growth is due to the contribution of their OWN money and really nothing else. It's great having different options available but you need to know how and when to make changes. Many people call their plan administrator's "800 number" or go online to seek help. The only information they used to receive was that the questioned mutual fund was a large cap growth fund or that the fund was a small cap value The central idea with the 401(k) was for the employee to take control of his or her own retirement and was designed to augment the de- fined benefit plan. This has changed as well. When the 401(k) began, the plans offered very limited choices. In some plans the only choice was a savings account, offering a certain percentage earning on the employ- ee's contribution. That was it. At that time companies were very hesitant to start 401(k) plans. One of the first organizations to do so was Hughes Aircraft Company. Once employers learned the 401(k) was a great alternative to funding the organization's massive defined benefit plan liability, they became very popular. Johnson & Johnson, PepsiCo, Honeywell, and JC Penney hopped on board the 401(k) train. As the plan's popularity grew, com- Let's take a look back to when 401(k) plans began. The term 401(k) is the section of the IRS tax code that created retirement plans. Before the plan's creation in 1978, the only retirement plan that was available to most individuals was the defined benefit plan. These plans were the opposite of how 401(k) plans presently work. A defined benefit pension plan is based on one's salary for a certain period of time. The company then calculated how much of the investment would be required to be put away for the individual's future retirement. A 401(k) actually defers income, meaning you are putting your own money into the plan. So as 401(k) plans began to evolve, companies started to make a small matching contribution as well. This benefit has slowly declined, and even disap- peared, at some businesses. T he 401(k) savings tool has come a long way since its inception, offering more options and versatility than ever before. The problem is that many plan participants aren't aware of these changes, and that can result in unproductive plans that are greatly affecting retirement outcomes. When I speak with people who have a 401(k) at work, it seems they are not receiving the proper information on their plans, which may be posted on their employer's company website or in a long form letter filled with confusing technical jargon. This has been a problem with 401(k) plans from the very begin- ning. There has been no advice or guidance on what is arguably the largest pool of retirement savings for most individuals. Are you properly managing

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