What do the changes to state workers’ 401(k) plans mean for me?
California state workers soon will face higher fees and have fewer investment options in the retirement savings plans many use to supplement their pensions. We heard from several workers about the changes.
Savings Plus, which manages the plans under CalHR, will offer six funds instead of 14 in workers’ 401(k) and 457 retirement plans starting April 1, according to an announcement of the change.
The change will eliminate most of the index funds in the plans, which broadly track groups of companies in the stock market with little input from fund managers. Workers’ money will be moved into actively managed funds, in which managers hand-pick specific companies to invest in and charge more for their involvement.
Management fees for the actively managed funds range from about a tenth of a percent to a half of a percent higher than the fees for the index funds, according to a Savings Plus chart. The actively managed funds also have higher operating expenses, which get deducted from workers’ returns on investment.
For the last decade, index funds have performed better overall than actively managed funds. But results have been mixed in the Savings Plus plans, with managed funds slightly outperforming index funds in some cases.
The April changes eliminate the index funds that have not done as well as their managed counterparts over the long term, CalHR spokesman Andrew LaMar said in an email.
LaMar said the actively managed funds have performed better over time even after the extra fees are taken into account. Lamar said the change is being made after a consultant, Callan LLC, recommended it.
“Savings Plus has decided to change the core fund lineup to make it easier to build a diversified portfolio to provide the greatest opportunity for investment returns,” LaMar said in the email.
The investment fees for the actively managed funds are in line with what people pay in private sector 401(k) accounts.
The Legislature created the plans for state workers in 1974. They are optional and complement the pensions the state pays employees. About 155,000 active state workers out of about 230,000 have the plans.
Among the 14 plans offered now, five are index funds. Four of the index funds are being eliminated.
One of them, which tracks the biggest public companies with the highest-valued shares, will remain. Going away are index funds that track small and medium companies, international companies and bonds.
Each of the index funds has a corresponding actively managed fund for each market category.
The actively managed funds outperformed the corresponding indexes in a 10-year timeframe, according to performance results. Results over five years were mixed, with some indexes outperforming managed funds.
The program allows plan participants to move their money around to different funds or to select a “target date” option that puts their money in funds with different risk levels according to when they turn 65.
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Plan participants will be able to choose among the new lineup of plans from April 1 to May 22. If they don’t make changes, their money will be invested in “target date” funds based on when they turn 65.
California state workers can choose a different investment plan with more options by enrolling in what’s called a Personal Choice Retirement Account offered through Charles Schwab.
