401(k) statements act as financial planning tools

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Providing a financial statement to participants in an employer-sponsored 401(k) plan used to be a simple matter. At the end of each reporting period, you provided the beginning balance of the account, a summary of activity within an account and an ending balance.|ret||ret||tab|

Today, participants in 401(k) plans need more from their statements. For one thing, 401(k) plans are more complex, with a wider range of investments from which to choose, added features such as loan capabilities, and frequent opportunities to change contribution levels and investment choices.|ret||ret||tab|

On top of that, retirement income increasingly is becoming more dependent on employer sponsored plans that require self-direction, and investors are becoming more sophisticated. More than ever, employees want the information and guidance that will help them answer the big question: Will I have enough money for my retirement?|ret||ret||tab|

Statements today need to be personalized, forward-looking documents that facilitate decision-making so that participants can reach this goal. Using employees' own information such as age, contribution rate and asset allocation statements can be tailored to each participant. By including financial planning and other dynamic information, you can provide added value to 401(k) statements, making them more than just static documents that chronicle the past. |ret||ret||tab|

|bold_on|What statements should contain|ret||ret||tab|

While there is a wide range of opinions, overall, Merrill Lynch research has found that most plan sponsors would like to use 401(k) plan statements to help motivate their employees to plan to meet long-term retirement goals. Generally, plan sponsors agree that plan statements are widely read by employees and their spouses, and are the most appropriate vehicle for conveying financial and educational information.|ret||ret||tab|

For example, as part of a comprehensive effort to transform Merrill Lynch-provided 401(k) statements into better retirement planning documents, Merrill Lynch held a series of focus groups comprised of plan sponsors representing large, middle and small market companies around the country. |ret||ret||tab|

In these groups, plan sponsors were asked what they and their plan participants would like to see in a plan statement in terms of design, content and organization of information. On the whole, plan sponsors stated that they would like to see their statements contain these enhancements:|ret||ret||tab|

Personalized rates of return. For a number of reasons, the return on each participant's portfolio can differ, even if they contain the same investments. A portfolio's rate of return is affected by the timing of contributions or withdrawals, transfers between funds, loans and other actions. A statement that gives a personalized return calculation provides a more accurate look at individual gains and losses.|ret||ret||tab|

Investment benchmarks. Many employees would like to know how their investments are performing relative to other investments of the same kind. Statements that provide standard benchmarks for comparative purposes should provide a valuable decision-making tool. |ret||ret||tab|

This might include, for example, the performance of the S&P 500 index to compare with indexed mutual funds, or a Lipper average return for mutual funds in any given segment, such as technology funds, for example. Providing appropriate benchmarks ensures that participants can establish realistic expectations for investment return and make appropriate comparisons on a fund-by-fund basis.|ret||ret||tab|

Asset allocation summaries. If a 401(k) plan statement is truly to become a planning document, it needs to convey information about asset allocation, a fundamental tenet of long-term investing. An employee needs an explanation of how allocating assets between investments of different types stocks, bonds and cash equivalents can minimize risk and increase long-term returns. This and other investment and financial planning topics could be covered in educational articles as part of a benefits statement.|ret||ret||tab|

Using this information, and perhaps models with suggested asset allocations based on investment profiles, an employee could decide what allocation of assets is appropriate for his or her situation, personalized for a number of factors, such as age, contribution rate, individual rate of return and desired retirement age, among other things.|ret||ret||tab|

Beyond that, a statement could show how, over time, an initial target allocation might change as some investments outperform or under-perform others and comprise a larger or smaller percentage of an overall portfolio than originally intended. A graphic representation of this asset allocation information could alert employees of the need to periodically rebalance their assets to retain their desired asset allocation.|ret||ret||tab|

Highlights and detailed summaries. Employees differ as to the amount of information they feel they need to manage their 401(k) accounts. To accommodate these needs, a statement should provide a one-page summary of highlights of activity for the statement period, followed by more detailed information for those who want a more in-depth look.|ret||ret||tab|

A highlights section should include the most basic information: the account's beginning and ending balances; activity for the period; rates of return for the period and perhaps extended periods of 12 months, three years and five years; contributions and loan activity; and a graphical asset allocation representation.|ret||ret||tab|

More detailed activity and value summaries would break down this information more thoroughly on an investment-by-investment basis. Performance figures for all the company's investment options might be included, so an employee could compare the investments in his or her portfolio to other options offered within the plan. |ret||ret||tab|

Consolidated benefits statements. More and more, people say they are being inundated with the paperwork that accompanies their investments. Anything an employer can do to eliminate or consolidate paperwork is welcome news to employees. Some employers would like to offer consolidated benefits statements that encompass all of a company's plans, including profit-sharing, 401(k) and deferred-compensation plans.|ret||ret||tab|

|bold_on|Technology brings changes|ret||ret||tab|

Such complex and informative statements are possible today because of huge advances in technology. Graphic representations of complex information can easily be generated, and data from multiple sources can be merged to create statements with a high level of value to plan participants and sponsors.|ret||ret||tab|

Even more importantly, Internet and intranet Web sites are revolutionizing the way employees receive and process information in order to plan for their future. Providing online access to balances, account information and transactional capabilities can ease the demand on the human resources personnel. |ret||ret||tab|

It can also be more cost-effective than paper statements, particularly as your statement becomes a more complete and dynamic document, and you require updated statements more frequently.|ret||ret||tab|

You can also use technology to present information that supplements your benefits statements. For example, core financial planning tools, such as asset allocation simulations, can be easily presented through the Internet or CD-ROM applications.|ret||ret||tab|

|bold_on|(Patrick J. Walsh is a senior vice president and director, Group Employee Services, for Merrill Lynch's Princeton, N.J offices.) |ret||ret||tab|

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