Defined-contribution plans are the lifeblood of America's private-sector retirement system. Fifty-five million Americans have assets in plans totaling $4 trillion. Vanguard Group's 2009 study "How America Saves" revealed that its average DCP account balance was $56,030 with 79% of participant contribution allocation invested in mutual funds, 8% in company stock and the remaining 13% in cash.

To find this information for a specific company, one must go to the 11-K where the plan holdings are described in detail. While the DCP has little to do with the operations of a business, you'll find some interesting information within them.

IN PICTURES: Digging Out Of Debt In 8 Steps

2008: A Bad Year
Everyone had a tough year in 2008 and it's reflected in the average account balance of Vanguard's defined-contribution plan holders who saw a drop of 28.5%. There was nowhere to hide although some did better than others. For instance, if you look at Kroger's (NYSE:KR) 2008 11-K, you'd see that its plan assets depreciated 27.3% or $27.1 million last year. That's slightly less than the Vanguard average.

However, Kroger stock held within the plan depreciated by just $18,000 compared to $19 million for the mutual funds and retirement date funds in the plan. Year to date, Kroger stock has beaten the S&P 500 by over 15% and the stock has had a good defensive position during this recession. Too bad its employees didn't hold more of its own stock. (Retirement date funds are also commonly known as target date funds. Learn about them in The Pros And Cons Of Target Date Funds.)

Level Of Compensation
All 11-Ks have a section at the beginning describing the mechanics of the plan including such basics as the maximum contribution. Companies may have different maximum contributions for different salary ranges. One company that does is General Mills (NYSE:GIS). Here's a direct quote: "The total of before-tax and after-tax contributions in no event can be more than 30% of compensation for non-highly compensated employees and 15% of compensation for highly compensated employees."

General Mills is a good company in my opinion but the choice to rank-and-file employees is a bit of a slap in the face. Unfortunately, this is the language used by the Internal Revenue Service and likely the reason for its inclusion. Are there no other words in the English language to describe the level of contribution allowed for various pay scales? Next, we'll see it replacing "nonhighly" with "lowly" compensated employees.

Borrowing Against Your Plan
One of the most interesting components of many plans is the ability to borrow up to 50% of your account balance at interest rates of prime or slightly higher and repaid over a number of years depending on the use of the proceeds. In 2008, 74% of Vanguard's 401(k) plans allowed participant loans with approximately 17% possessing outstanding balances, which averaged $8,600.

It may be a coincidence but the transportation industry (Chrysler, Ford & GM) has the biggest percentage of loans outstanding with 20% of its participants owing money to them. Ford's (NYSE:F) plan is quite generous when it comes to loans, offering employees an interest rate of prime repaid over a maximum of five years, except for the purchase of a home, when the term extends to 10 years. While most DCPs allow only one loan outstanding at a time, Ford allows up to four, which probably accounts for the $159 million in outstanding loans at the end of 2008. Interestingly, trustee Marshall & Ilsley (NYSE:MI) doesn't allow them despite administering plans that do.

Securities Lending
Institutional investors such as defined-contribution plans often lend their stock to brokerage houses as a way to make additional returns on its funds. The borrower provides 102-105% of the stock's value in some form of fixed income collateral in return for a title on the shares. In 2008, many lenders lost money.

Mutual fund processor DST Systems (NYSE:DST) lost $1.4 million in its plan last year due to a reduction in the fair value of the collateral given by borrowers of its stock. As a result, it's stopping the practice. If I was a DST shareholder, I'd be very happy. This is an insidious practice in my opinion despite a legitimate liquidity argument made by proponents of shorting.

The Bottom Line
Two additional subjects worth learning about are Master Trusts and 103-12 Investment Entities, which give investors further insight into the business of retirement savings. Understanding how these plans work will make you a better investor.

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

Related Articles
  1. Options & Futures

    Cyclical Versus Non-Cyclical Stocks

    Investing during an economic downturn simply means changing your focus. Discover the benefits of defensive stocks.
  2. Insurance

    Cashing in Your Life Insurance Policy

    Tough times call for desperate measures, but is raiding your life insurance policy even worth considering?
  3. Mutual Funds & ETFs

    The 8 Most Popular Vanguard Funds for a 401(k)

    Learn about some of the mutual funds in Vanguard's lineup that are popular among 401(k) investors, and find out why you should consider them.
  4. Financial Advisors

    How to Help Plan Sponsors Meet Fiduciary Duties

    Advising 401(k) plan sponsors is a great business model for financial advisors. Here's how advisors can help plan sponsors meet fiduciary obligations.
  5. Investing Basics

    How to Deduct Your Stock Losses

    Held onto a stock for too long? Selling at a loss is never ideal, but it is possible to minimize the damage. Here's how.
  6. Retirement

    What Happens to a 401(k) After You Leave Your Job?

    Find out what happens to your 401(k) after you leave your job. Learn about your five primary options, including cashing out and rolling over to a new plan.
  7. Retirement

    How 401(k) Matching Works

    Find out how employer matching of your 401(k) contributions works, including how employer contributions are calculated and annual contribution limits.
  8. Taxes

    10 Money-Saving Year-End Tax Tips

    Getting organized well before the deadline will curb your frustration and your tax liability.
  9. Retirement

    How to Stretch Your Retirement Savings

    What does "nest egg" mean for your personal situation? Will you deplete it, or will you nurture it to generate income that lasts throughout retirement?
  10. Economics

    Is Wall Street Living in Denial?

    Will remaining calm and staying long present significant risks to your investment health?
  1. Are catch-up contributions included in the 415 limit?

    Unlike regular employee deferrals, catch-up contributions are not included in the 415 limit. While there is an annual limit ... Read Full Answer >>
  2. Can catch-up contributions be matched?

    Depending on the terms of your plan, catch-up contributions you make to 401(k)s or other qualified retirement savings plans ... Read Full Answer >>
  3. Are catch-up contributions included in actual deferral percentage (ADP) testing?

    Though the Internal Revenue Service (IRS) carefully scrutinizes the contributions of highly compensated employees (HCEs) ... Read Full Answer >>
  4. Who offers 401(k) plans?

    401(k) plans are one of the most common retirement plans available. A 401(k) plan must be offered by a business. These plans ... Read Full Answer >>
  5. Can a 401(k) be used for a house down payment?

    A 401(k) retirement plan can be tapped to raise a down payment for a house. You can either borrow money or make a withdrawal ... Read Full Answer >>
  6. How old do I have to be to make catch-up contributions?

    Most retirement plans such as 401(k), 403(b), individual retirement accounts (IRAs) and Roth IRAs allow for catch-up contributions ... Read Full Answer >>

You May Also Like

Trading Center