Recently the media and some prominent financial industry groups have made the shortcomings of 401k plans more prominent.
In April, PBS Frontline produced a special titled The Retirement Gamble, primarily focusing on 401k plans and their inadequate performance.
The special is a great watch, but if you don’t have the time to view it, two of the main points in the video are:
Costs Matter
You do not receive a bill for the fees and expenses in your 401k plan, but rest assured they are being deducted and have an overall impact on how much money you wind up with when you retire. Some of the fees you are being charged include fund expenses, administration, and asset management expenses. A recent AARP study concluded that 70% of Americans did not even realize there were fees associated with their 401k.
One of the reasons that I recommend IRA’s over 401k plans is that most IRAs have no fees associated with them and you can add almost any type of investment in an IRA versus the 10-15 choices that you are usually limited to in a 401k plan.
Fiduciary Responsibility
If you are going to invest in a 401k plan ensure that you use a provider that agrees in writing to act in your company’s 401k plans best interest. The unfortunate reality is that firms in the brokerage, banking, and insurance industry have no legal fiduciary obligation to their clients that would require them to place the interests of those clients ahead of all others, including their own. Instead they operate on a much lower “Suitability” standard. Their representatives are commissioned salespeople who are incentivized to sell products, especially the ones that generate the highest earnings for themselves and their companies.
You may think that you do not have any input on the decision your company makes with its 401k plan, but you would be surprised if you and other employees bring your concerns to your HR and finance department of your company.
Frontline is not the only outlet talking about 401ks. Jim Cramer, the host of CNBC’s show Mad Money is not the biggest fan of 401k plans either. In a CNBC article, 401k Dirty Little Secrets, Cramer said “One of the basics of retirement planning – contributing to a tax deferred 401k plan – could come with a serious downside.” “As much as I like the tax-favored status of 401k plans, I need to tell you something heretical, something almost nobody else will come out and say: Most company 401k plans stink.” Many people think Cramer is a maniac for acting like he drinks a gallon of redbull right before he goes on the air on his show Mad Money, but he is spot on with his assessment of 401k plans.
Dan Solin of the Huffington Post recently wrote an article, 401k Participants Pay Dearly for the Crime of Underperformance on how 401k plans are usually loaded with actively managed funds which often underperform. It’s no coincidence that actively managed funds almost always come with higher fees.
Corporate America has shifted the burden retirement to individuals. Companies offering guaranteed pensions are on the decline and ensuring a secure and safe retirement is up to you. The wrong decisions or not making a decision can cost you hundreds of thousands of dollars over your career.
Last year I wrote a paper, Top Reasons to Rollover Your 401k, describing the options available that you have with your 401k once you retire or leave the company you are working for. Because of the high fees and poor investment choices associated with most 401k plans I wrote that it usually makes sense to roll it over into an IRA.