MORE than 20 million Americans trust themselves more than they do the Social Security system.
Stated less jocularly, 22.3 million Americans, through 401(k) plans, actively take responsibility for building part of their own retirement nest eggs, using pre-tax deductions from salaries. The 401(k) arena is expanding at the rate of 15 percent a year.
Up to now, it has been mostly large companies that have offered 401(k) plans to their employees. But that is expected to change.
Most growth in new 401(k) contracts will be with small companies - firms employing five to 100 people, says Jeffrey Close, communications director for Access Research Inc. of Windsor, Conn., a consulting firm that serves large 401(k) providers, such as banks, insurance firms, and mutual fund companies.
"But this is not a highly profitable area because of the cost of providing the product," he cautions.
Fidelity Investments, the Boston-based mutual-fund giant, has a special unit that serves small businesses. Early this month Fidelity announced a partnership with the US Chamber of Commerce to offer a package of retirement plans, including 401(k)s, to the Chamber's 215,000 member companies, many employing under 100 people.
The Chamber estimates that about 80 percent of America's small businesses do not offer retirement savings plans.
President Clinton last week proposed a package of proposals to make 401(k) pensions more secure and available, especially for middle-class workers at small firms. Withdrawal rules, for emergencies and education, would be eased. Also, 401(k) plans would be made more portable from one job to another job.
Congress in the early 1980s initiated 401(k)s as a supplement to Social Security, which is now widely seen as needing actuarial adjustment if it is to remain solvent. Uncertainty over Social Security definitely helps drive the 401(k) market, experts say.
Funds winning 401(k) money
Much of this money pours into mutual funds and then on to the stock and bond markets - especially stocks, since interest rates declined last year.
At Fidelity, for example, 401(k) money in total mutual funds shot up from 12 percent in 1991 to 22 percent in 1995.
These 401(k) accounts, nationally, now hold $675 billion in assets, Mr. Close says.
Employees of nonprofit organizations enjoy a similar provision called the 403(b).
With these financial vehicles rapidly becoming the preferred savings tool of Americans, such assets will grow strongly in coming years, Close and others say. People can put $2,000 a year into an Individual Retirement Account, for example, but if their salary is high enough, they can put up to $9,500 a year into 401(k)s. And employers can add matching funds on top of this, should they wish to encourage employee savings.
Access estimates the amounts in 401(k)s will rise to $1.15 trillion with 26 million participants by 1999, and to $1.475 trillion with 28 million participants by 2001.
"The basic message is, if you want to retire comfortably, take control of your own destiny," says Peter Smail, president of Fidelity Institutional Retirement Services Company of Boston, a subsidiary of Fidelity Investments. Fidelity, the nation's largest mutual-fund company, is also the No. 1 provider of 401(k) plan services.
"There are lots of folk skeptical of what Social Security will look like in 10 years," Mr. Smail adds.
The shift to 401(k)s in the US is "a generational shift," says Rich Koski, a benefits consultant with Buck Consultants Inc., a New York-based firm that does actuarial studies and designs pension plans for businesses.
He means "generational" in two senses.
First, businesses for 10 years have been making a sea-change shift away from "defined benefit" pensions, in which the employer defines, through a percentage formula, what an employee will get for retirement benefits, often in the distant future. In such plans, the money is held in a pool and , in many of these plans, employees receive estimates of their stake in it each quarter.
The current trend in company retirement plans is "defined contribution" plans, in which employees can elect to put a portion of their own pre-tax salary into a 401(k) or some other vehicle and employers regularly kick in a defined contribution.
But if an employee does not join the plan, the employer does not have to put in a red cent. Nor does an employer have to offer a pension plan of any kind.
Second, the shift to such plans is also "generational" because employees today tend to be more independent than those in years past, Mr. Koski says - they now want to see what's building in their account as often as each day in some cases.
Because their 401(k) pension money is in an individual account, not a pool, and because the funds are often in a mutual fund, all workers have to do is look at their funds' prices in the newspaper. Or they can call the carrier any time to get their balance or even shift investments from one fund to another.
Businesses also like the defined-contribution concept, Koski says. Under it, the employee bears the investment risk, while under defined-benefits, the employer carries the investment risk.
The Department of Labor issued regulations in 1994 that spelled out what employers must do to set up a sound plan and thereby keep the risk on the employees' side. The requirements include providing employees with enough information on available investments and providing investment options wide enough to meet the needs of a range of employee-investors - some of whom will be conservative relative to risks, some of whom will have high tolerance for investment risks.
The most radical 401(k) plan - one of Fidelity's - offers a brokerage option so that an employee can choose to invest in individual stocks as well as up to 2,000 mutual funds. But only a handful of companies offer it.
Metropolitan Life Insurance Company., long a big player in 401(k)s, with $35 billion in defined-contribution assets signed up, is an example of a provider that just expanded its investment opportunities even further than before. In the middle of March it added some major fund families to its lineup: Janus Capital Corp., Founders Funds, Scudder Funds, Twentieth Century, and several others.
This means that employees whose firms use MetLife as a 401(k) provider can choose from the funds of these companies, without paying extra fees, as well as funds managed by MetLife's subsidiaries.
"This is a highly competitive industry," says Gary Lineberry, vice president of MetLife's defined-contribution group," and employee-investors want choice and flexibility."
He says that "what is really exciting is that the 401(k) service business is becoming an information-communication business, with growing sophistication of investors and rapid addition of technology."
If MetLife manages your 401(k), for example, you can call into its highly automated phone system for instant information on your account, prices of all funds, and you can make trades among funds through an automated process. If you need help, a specialist will come on the line. Fidelity is also a known innovator in this area of high-tech customer service.
The IRS over the past two years has increased its auditing of 401(k) plans, according to Koski and others. In some cases firms deducted 401(k) money from payrolls and used it for their own purposes during a "float" period before putting it to work on the workers' behalf, Koski says, although this is rare.
Still, the pension area has always been heavily regulated, others note.