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How Good Is Your 401(k)?

When Sanofi froze its defined benefit pension plan last year, the top brass wanted to make sure its 401(k) was seen as a worthy replacement by the company’s 24,000 U.S. employees and retirees.

Sanofi has succeeded, judging by Plan Sponsor magazine’s designation of the U.S. division of the French pharmaceutical giant as 2013 “Plan Sponsor of the Year.”

In corporate America, 401(k) plans are now the norm: in 2012, only 11 of Fortune magazine’s 100 largest companies still offered a traditional defined benefit pension, according to the consulting firm Towers Watson. But Sanofi U.S. had strong motivation for designing a 401(k) that is generous compared with typical 401(k)s.

The company has “highly technical, highly specialized, highly skilled [employees] that we have to recruit for and retain,” said Richard Johnson, senior director of benefits. “We wanted to ensure our employees had adequate retirement income.”

Squared Away recently interviewed Sanofi executives about their plan’s details, shown below, which readers can compare with 401(k) plans in their own workplaces. We hope you’ll post a comment on Facebook and let us know how, or whether, yours stacks up.

Here how Sanofi compares with other 401(k)s:

To ensure that employees participate in the 401(k), the company automatically enrolls everyone into its plan. Although they can opt back out, most stay. The company also made it more difficult for employees to use their 401(k)s as emergency funds by limiting the number and frequency of loans they can take out of their savings.

“Their 401k is very generous, very robust – a fabulous plan – and they see it as part of their compensation package,” said Francisco Negron, head of T. Rowe Price’s retirement plan services for clients, which include Sanofi.

The plan redesign last year followed 2010 improvements on the investment side, including reducing the number of mutual funds that employees can pick for their investments. This change was intended to minimize confusion over what to invest in. Low investment fees – 0.33 percent of assets – also mean employees can keep more of their savings for retirement.

“With the size of our plan, we have the ability to negotiate” fees, said Ed Grass, treasurer.

As good as Sanofi’s plan design is, however, a 401(k) remains a complex animal. When someone retires, the challenge changes from building up and investing one’s savings to figuring how to spend it. In contrast to defined benefit pensions that issue a fixed pension check every month, 401(k)s pose a host of confounding questions: How fast can I spend my savings? Should I save it all for a nursing home? Can I afford to travel? What about taxes? Inflation? Are the investments I picked still okay?

Sanofi retirees have various options: withdraw all their savings at once, periodically withdraw funds at their discretion, or set up regular cash withdrawals each month, quarter, or year. Sanofi offers employees some help, in the form of an online calculator to guide drawdown strategies and an annual webinar.

But retirees at any company with a 401(k) remain at risk when making complex decisions about spending their precious savings. A few big mistakes over the next 10, 20, or 30 years, and one of two things can happen: the retiree runs out of money or is over cautious and doesn’t spend enough, forgoing opportunities to enjoy retirement.

Readers: what type of arrangement does your employer have and how does it compare with Sanofi’s? If you’re retired, how are you managing your accumulated savings?

6 Responses to How Good Is Your 401(k)?

  1. Anne DiNoto says:

    My employer has a 403(b); employees contribute 3% of their base salary and the university contributes an amount equal to a percentage of the base salary. For example, for an employees under age 45, the university contributes 5% of the base salary, up to the integration level PLUS 10% of your base salary about the integration level.

  2. Having the employer actually make contributions to defined contribution plans is a phase most companies with older plans went through back in the day.

    In each recession, more cut the contributions to zero or almost zero.

    The 401(k) plan works like this. The government gives you a subsidy to have the employer control your savings. Increasingly just your own savings, with no employer contribution at all.

    Instead of you voting the shares of stock companies, they do. And they get to pick the investment company. Somewhere in America, someone in personnel is getting a higher kickback in exchange for selecting a higher cost investment company.

    If I could invest on my own the same amount of money, as I can for college (529), there is no way I would want a 401(k).

  3. I feel my company has a pretty great 401(k) plan. My employer matches 100% to the first 3% and then 50% on an additional 2%. We also get to choose between a traditional and a Roth 401(k).

    When a company automatically enrolls someone in a 401(k) plan how much gets deferred? Is it 10% or is that just the average?

  4. Kim Blanton says:

    Dear Broke Millennial — great question!

    The automatic enrollment is only a mechanism for boosting participation in the 401(k). As far as I know, it is not linked to a specific percentage that either the company or the individual contributes to the 401(k). These contribution rates vary all over the lot, though Vanguard data show the typical employer match is 3 percent.
    However, one research finding that Squared Away wrote about showed that auto enrollment may cause lower match rates. The link is here: http://squaredawayblog.bc.edu/squared-away/research/corporate-match-falls-in-auto-enrollment/

    Kim, the blogger

  5. Amy says:

    As a financial advisor who encourages employees to participate in their retirement plans, and helps people allocate their 401(k) plan contributions, I am consistently surprised at how complicated signing up for such a plan is in many companies.

    I recently assisted an entry-level employee enroll in her plan; I counted the number of decisions she had to make in order to enroll. There were over 15 distinct decisions, each requiring a level of knowledge she did not have. Each decision in the decision tree was aided by incomprehensible directions. The enrollment required that she not only determine an allocation of risk, then an allocation of asset class, but also a choice from over 45 mutual funds in each of the asset classes. If I had not been sitting by her side, she would not have had a clue how to proceed, and I’m sure she would have abandoned the idea all together. People new in the work force, as well as people who are living paycheck to paycheck, are ambivalent about participating, and the smallest obstacle throws them off course.

    I spend a good deal of time educating plan sponsors (the employERS) about simplifying the decisions their employees have to make in order to increase participation. I wish the plan designers (the manufacturers – mostly mutual fund companies) would also simplify the choices and the enrollment process. I would love to see a pilot study by some plan designer to see if a sample group of employees would have increased participation with simpler enrollment processes.

  6. Michwen says:

    It’s not an opinion on how good your 401(k) plan is. It’s science.

    With today’s tools and technology, one can get truly unbiased personal recommendations. Take, for example, the website http://www.jemstep.com. This site takes your personal circumstance, goals, and plan into account then guides you to the appropriate asset allocation and finally tells you exactly what to sell, buy, and hold to obtain the optimal performance.

    More importantly it tells you why.

    I don’t believe a broker/advisor can do the deep analysis as accurate as technology. My “ex-broker” just knows how much to charge and talk about the could have been…