Making a statement

Statements for today’s 401(k) plans need to be personalized, forward-looking documents that facilitate decision-making so that participants can reach their goals.

By using employees’ personal 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.

Statements should contain:

Personalized rates of return. The returns of each participant’s portfolio can differ, even if they contain the same investments. A 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.

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 provide a valuable decision-making tool.

Benchmarks might include 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. Providing appropriate benchmarks ensures that participants can establish realistic expectations for investment return and make appropriate comparisons on a fund by fund basis.

Asset allocation summaries. If a 401(k) plan statement is to become a planning document, it must convey information about asset allocation, a fundamental tenet of long-term investing. Employees needs explanations of how allocating assets among 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.

Using this information, and perhaps models with suggested asset allocation based on investment profiles, an employee could decide which allocation of assets is appropriate for his or her situation, personalized for age, contribution rate, individual rate of return and desired retirement age, among other things.

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

Highlights and detailed summaries. Employees differ as to the amount of information they feel they need to manage their 401(k) accounts. To accommodate each employee’s 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 an in-depth look.

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

More detailed activity and value summaries break down this information 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.

Consolidated benefits statements. People say they are being inundated with the paperwork that accompanies their investments. Anything an employer can do to eliminate or consolidate paperwork is welcomed by 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.

Patrick Walsh is senior vice president and director, group employee services, for Merrill Lynch at its Princeton, N.J. offices.