"In many cases, collective trusts have the exact same manager as a mutual fund, but they are a different type of vehicle," says Hewitt's Hess. Because they are not publicly traded, there are fewer regulatory and administrative costs associated with collective trusts, which results in lower fees. They also have more-flexible fee structures, with lower costs for plans with more assets.

For the Savviest
For the most sophisticated plan participants, some employers are now offering self-directed brokerage accounts within their 401(k) plans. While only about 18 percent of employers currently offer such an option, the number is growing, says Hess. Just 2 percent of employees use the brokerage option when it is available, but it is a good way to appease the savviest investors, who also tend to be the most vocal, she says.

"If you're making a big change in your plan and reducing the number of funds, there are going to be people in the plan who are downright upset, and it tends to be the people with the bigger balances," says Hess. The average user of self-directed brokerages has $100,000 in plan assets, compared with about $80,000 for the average 401(k) participant, according to Hewitt.

Users of the self-directed brokerage option typically pay a fee, and they may sign an agreement that acknowledges that the responsibility to research investments lies with them, not the plan sponsor. By providing the vocal minority with the option to invest in a wide array of funds or securities that have not been screened by the company, employers can then comfortably pare down their core plan offerings to the 10 or 12 funds that will meet the needs of most employees. Those employers who are concerned about the risk that comes with a self-directed brokerage account can set limits: employees may be restricted to investing only in mutual funds, or there may be a cap on the percentage of their contributions they can devote to the brokerage account.

For most companies, however, the greatest challenge of providing an effective 401(k) plan lies not with the savvy few, but with the unsophisticated many. The Labor Department notes that fully a third of eligible workers do not even participate in their companies' 401(k)-type plans. Revisiting a plan to make sure it has a reasonable mix of funds, and an approachable structure that will encourage savings and participation, is a good way to get those workers on board.

Kate O'Sullivan is a senior writer at CFO.

Sobering Statistics

With guaranteed pensions rapidly becoming a thing of the past, 401(k) savings will be all many workers have when they reach retirement, aside from a Social Security benefit. But utilization and savings rates continue to lag far behind where they need to be to replace employees' incomes. Fidelity Investments, the 401(k) behemoth, provides the following statistics about the 10.1 million participants in its plans in 2006:

• $66,500 — Average account balance

• 63.1% — Average plan participation rate

• 7.0% — Average percentage of salary invested by participants

• 20% — Percent of participants invested 100% in their plan's default option

• $78,800 — Average compensation of plan participants

Source: Fidelity Building Futures VIII

The Best Mix

Retirement-plan advisers urge employers to keep their fund offerings simple so as not to scare off participants. For a streamlined but effectively diversified 401(k) offering, experts suggest choosing one or two funds from each of the following categories:

• Domestic equities, possibly broken out into value and growth funds or small-cap and large-cap funds

• Domestic bonds

• International equities

• Stable value/capital preservation

• An index fund

• A series of lifecycle funds

Four for Default

A new regulation issued in October under the Pension Protection Act specifies four qualified default investment alternatives for 401(k) plans:

1. A product with a mix of investments that takes into account the individual's age or retirement date (for example, a lifecycle fund)
2. An investment service that allocates contributions among existing plan options to provide an asset mix that takes into account the individual's age or retirement date (for example, a professionally managed account)
3. A product with a mix of investments that takes into account the characteristics of the group of employees as a whole, rather than each individual (for example, a balanced fund)
4. A capital-preservation product for only the first 120 days of participation

Source: U.S. Department of Labor

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