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What's the Best Fix for Your "Underfunded" and Poorly Managed 401(k) Account?

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Workers in France are taking to the streets to protest the fact that they will have to stay in the workforce for a few more years -- as opposed to Americans, most of whom have to keep plodding along for a couple of decades but don't realize it.

Ironically enough many public sector workers in the U.S. observe National Save for Retirement Week Oct. 17 to 23, despite the fact that most of them don't have to save much because they are covered by a pension, as opposed to only the "pretend pension" known as the 401(k) plan. More than 80% of the public sector is still covered by a pension, as opposed to less than 10% of the private sector.

While the Pew Center on the States recently issued a report entitled "The Trillion Dollar Gap" contending that most of the state pension plans are under water, AFSCME Secretary-Treasurer Lee Saunders insists that the combined deficit represents less than 2% of state and local government spending and will remedy itself once the economy rebounds.

Saunders is also one of the few Americans that understands that it's the "underfunding" of 401(k) plans that is the train wreck that nobody's talking about. As Saunders points out in his recent blog post, the median 401(k) account balance is less than $13,000. As I've pointed out, the scarier statistic is that the first wave of Boomers who are scheduled to start retiring next year have only accumulated one fifth of the "ten times final pay" in their accounts that pension actuaries say savers should aim for.

Saunders says we should consider fixing 401(k) plans by looking at strategies that "combine the portability features of 401(k) plans with professional investment management." While I still think the most important fix to the savings shortfall is to triple the measly 3% employer contribution (which these days is likely to be "suspended"), maybe we should also consider firing the folks that manage 401(k) assets as well.

How about offering 401(k) savers an option to invest their funds in a government run 401(k) plan similar to the Thrift Plan, which manages low-cost index funds for three million federal and civil servants? Maybe we ought to go a step further and pool the assets, rather than have individual accounts, in which participants often make poor investment decisions.

Frankly, this shift to passive management would be a good fix for private sector workers AND state workers. Let's face it, "professional management" is an oxymoron when it comes to many state plans.

Just a few examples:

  • Last year New York State Attorney General Andrew Cuomo created a task force with 36 other attorneys general to share info about abuses of government pension funds, focusing on pay-to-play schemes and other shenanigans. Last week Former New York State Comptroller Alan Hevesi admitted he approved a250 million pension investment in exchange for nearly1 million in trips, sham consulting fees and campaign contributions.
  • The state of Pennsylvania pays 200-plus pension management companies more than250 million a year to make reckless bets on troubled banks, troubled venture capital companies and other questionable investments, according to the Philadelphia Inquirer.
  • This year the SEC charged New Jersey's pension fund with civil fraud for lying about whether it had covered its pension obligations to teachers and other state employees.

While the folks who manage 401(k) assets most likely won't be doing any perp walks, it's worth debating whether the fees participants pay them are worth it. Countless studies have demonstrated that managed funds can't beat passively managed index funds. What's more, while campaign contributions may not fit the strict definition of "pay to play," I wouldn't be surprised if the reason why Rep. George Miller, the go-to-guy on pensions, can't get legislation passed that would require every employer to offer index funds isn't a lack of interest but because the mutual fund industry showered big bucks on his colleagues to vote against it.

The even more reckless behavior by many mutual fund managers is their management of target date funds, which are supposed to automatically shift 401(k) participants' assets mix from stocks to fixed income investments as participants approach retirement age. Virtually every mutual fund outside of the Vanguard Group instead kept these investors scheduled to retire this year dangerously over-allocated in stocks -- more than 50% of their portfolios. As a result, in 2008 the average return of the four largest target funds in that category was minus 25.8%, almost as bad as the overall market slump for the S&P 500 that year of minus 38%. Finally, the fact that none of the mutual fund companies' leadership realize that most of their customers can't afford to retire is downright reprehensible.

Whatever the fix to our 401(k) disaster, time's a wasting to find and implement a remedy. Got more ideas? I'm all ears: please post your comments and let's crowdsource a remedy!