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. Investing News

    Bank Stocks: Time to Buy or Avoid? (WFC, JPM, C)

    Bank stocks have been pounded. Is this the right time to buy or should they be avoided?
  2. Stock Analysis

    Why the Bullish Are Turning Bearish

    Banks are reducing their targets for the S&P 500 for 2016. Here's why.
  3. Stock Analysis

    How to Find Quality Stocks Amid the Wreckage

    Finding companies with good earnings and hitting on all cylinders in this environment, although possible, is not easy.
  4. Your Clients

    How to Construct an Annual Review for Clients

    One of the best things that advisors can provide to clients is an annual review of their financial situation. Here are some guidelines.
  5. Retirement

    Roth IRAs Tutorial

    This comprehensive guide goes through what a Roth IRA is and how to set one up, contribute to it and withdraw from it.
  6. Investing News

    What You Can Learn from Carl Icahn's Mistakes

    Carl Icahn has been a stellar performer in the investment world for decades, but following his lead these days could be dangerous.
  7. Stock Analysis

    Are U.S. Stocks Still the Place To Be in 2016?

    Understand why U.S. stocks are absolutely the place to be in 2016, even though the year has gotten off to an awful start for the market.
  8. Investing News

    U.S. Recession Without a Yield Curve Warning?

    The inverted yield curve has correctly predicted past recessions in the U.S. economy. However, that prediction model may fail in the current scenario.
  9. Mutual Funds & ETFs

    4 Mutual Funds You Wish You Could Include In Your 401(k)

    Discover four mutual funds everybody wishes were in their 401(k)s. Learn which five-star-rated no-load funds leave their competition in the dust.
  10. Investing

    Retirees: 7 Lessons from 2008 for the Next Crisis

    When the last big market crisis hit, many retirees ran to the sidelines. Next time, there are better ways to manage your portfolio.
RELATED FAQS
  1. Where else can I save for retirement after I max out my Roth IRA?

    With uncertainty about the sustainability of Social Security benefits for future retirees, a lot of responsibility for saving ... Read Full Answer >>
  2. Will quitting your job hurt your 401(k)?

    Quitting a job doesn't have to impact a 401(k) balance negatively. In fact, it may actually help in the long run. When leaving ... Read Full Answer >>
  3. Can a 401(k) be taken in bankruptcy?

    The two most common types of bankruptcy available to consumers are Chapter 7 and Chapter 13. Whether you file a Chapter 7 ... Read Full Answer >>
  4. When can catch-up contributions start?

    Most qualified retirement plans such as 401(k), 403(b) and SIMPLE 401(k) plans, as well as individual retirement accounts ... Read Full Answer >>
  5. Who can make catch-up contributions?

    Most common retirement plans such as 401(k) and 403(b) plans, as well as individual retirement accounts (IRAs) allow you ... Read Full Answer >>
  6. Can you have both a 401(k) and an IRA?

    Investors can have both a 401(k) and an individual retirement account (IRA) at the same time, and it is quite common to have ... Read Full Answer >>
COMPANIES IN THIS ARTICLE
Trading Center