Here is the harsh reality: 401(k) plans are a false crutch for employees. They simply don't work, if you define "work" as providing funds that will permit retirement with dignity -- if at all. According to Fidelity Investments, average balances in 401(k) plans as of March 31, 2011 were $74,900. Those 55 and older had saved $233,800 on average. Given increased life expectancy, it is understandable that another study found that 61 percent of those surveyed said they were more scared of outliving their assets than they were of dying.
Things are not so grim for those who "service" the burgeoning 401(k) industry. These fees abound. It would take an actuary to figure them out. They include plan administration fees, investment fees and individual service fees. The big kahuna are the investment services fees which can include sales charges (also known as loads and or commissions) and management fees. The U.S. Department of Labor summarized these fees here.
There has been a lot of focus on fees. Studies have shown that plans with lower fees typically have higher average account balances. The Department of Labor has issued a new rule to improve the transparency of fees and expenses to employees in 401(k) plans. This rule (Labor Regulation 408(b)2) goes into effect April 12, 2012 and requires plan providers to disclose all fees to employers. Employers will be required to demonstrate they have a process in place to evaluate these fees and disclose them to employees.
While this is a good start, it will do little to increase average balances in 401(k) plans. The typical plan offers a mish-mash consisting primarily of actively managed mutual funds (where the fund manager attempts to beat a designated benchmark, like the S& P 500 index) with a few index funds and target date retirement funds tossed into the mix. Employees are left to put together a suitable risk adjusted portfolio. Many have no idea how to do so.
Here's what real reform would look like:
These simple reforms would radically improve the expected returns of plan participants.
The underlying fallacy in current efforts at 401(k) plan reform is that employees are capable of making intelligent investment choices when presented with a dizzying array of mostly poor investment options. I recently spent time with a group of nurse anesthetists whose plan we advise. It never occurred to me to ask them to give me ten needles and five choices of anesthesia (some good and some dangerous) and let me handle their next patient.
Why do we assume employees can be skilled investment advisers? We need reform that makes the process of making investment selections in 401(k) plans foolproof. Current reform just doesn't cut it.
Dan Solin is a senior vice president of Index Funds Advisors. He is the New York Times bestselling author of The Smartest Investment Book You'll Ever Read, The Smartest 401(k) Book You'll Ever Read, The Smartest Retirement Book You'll Ever Read and The Smartest Portfolio You'll Ever Own. His new book, The Smartest Money Book You'll Ever Read, will be available December 27, 2011.The views set forth in this blog are the opinions of the author alone and may not represent the views of any firm or entity with whom he is affiliated. The data, information, and content on this blog are for information, education, and non-commercial purposes only. Returns from index funds do not represent the performance of any investment advisory firm. The information on this blog does not involve the rendering of personalized investment advice and is limited to the dissemination of opinions on investing. No reader should construe these opinions as an offer of advisory services. Readers who require investment advice should retain the services of a competent investment professional. The information on this blog is not an offer to buy or sell, or a solicitation of any offer to buy or sell any securities or class of securities mentioned herein. Furthermore, the information on this blog should not be construed as an offer of advisory services. Please note that the author does not recommend specific securities nor is he responsible for comments made by persons posting on this blog.
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Dan: Which conflicts are prohibited here that are permitted when the advisor is just an advisor? Herb
And how much will the dollar be worth decades later?
The problem is the ruling class in this country which includes, Wall Street, our elected government and the multimillion dollar news talk show hosts on TV don't have a clue.
While the 99% were working, the ruling class set this country up to take care of the 1%, including themselves. They now want to destroy what the rest of us have left which is unemployment benefits, Medicare, Medicare, Social Security and public schools.
They have been such bullies and so obnoxious overseas that if the people of other countries buy they will not want to buy from this country.
Our elected government says they are working for democracy overseas, but it is not real democracy. We don't even have real democracy here anymore.
My employer forced us into a Merrell Lynch 401k plan in which the funds were dead in the water, and
in which the monthly statements showed only previous total, new contribution, and "result". It was a sorry excuse for a "retirement plan" .
http://www.sipc.org/pdf/HSPY_English_2011.pdf
What happened?
Companies decided to ditch their real pension plans. This happened in phases. Phase 1 the 80's and 90's brought huge stock market gains, so companies ditched them to get at excess assets. Phase 2, the last 15 years, companies ditched them because they had underfunded them and the lousy market coupled with low interest rates made them too risky.
In both phases, companies substituted 401(k) plans and gave them misleading names that included "pension" or "retirement". In phase 1, employees were eager to get the stock gains. Everyone was a genius. In phase 2, the employees had no choice.
Where did all that pension plan funding go? Right to the top in executive compensation. I know I was a pension consultant to Fortune 500 companies during that entire period and watched it all spool out.
The money market that I have in my IRA is not insured and I pay more than I get.
I said they keep interest low so people will put their money into the stock market.
Another reason is to starve Social Security of interest on their 3 trillion in savings.
I have not had good luck investing in my IRA. I pay too much attention to what the financial gurus say on TV and online. I panic and sell too soon, too.
I decided to pay for a professional's mutual fund and lost money and it still lost money after I sold it.
For myself, I need to learn to trust my own insight. There have been several groups I would have bought into if I had more faith in myself.
The constant buying and selling based on fear (buying hot items, selling them when they turn sour) is the cause of the losses.
I took and rolled it into my work 401k before the was nothing left
The only "foolproof" investment is one made up only of US government debt, every other one has risk. If you put the risk of being sued on the firm they will offer only one choice.
The price of US Treasury notes and bonds goes up and down every day. And given that we consume imported goods there is nothing "foolproof" about such investment. As I stated below, you missed Markowitz a few decades ago. Prudent investor standards have modernized. Some people remain in the dark ages.
I did not say there is no risk in the price of US Treasury notes and bonds, I said they were "foolproof". If a fool puts dollars into them they get dollars out at maturity. The risk component you worry about, inflation, should be priced into the yield at origination. And since I know very few people who convert their dollars to another currency to buy those imported goods they consume, I think the issue is in reality the quality of life we expect to be able to buy for that invested dollar.