I’ve written at length about problems within the retirement plan system here in America. Perhaps the biggest drawback for employees is that those secure pensions of the 80’s and 90’s are, for the most part, being replaced by employee-funded 401(k) and 403(b) plans. While it may seem like only an operational switch, it’s actually a huge downgrade for most employees. Instead of having definite figures to rely on for future financial security, workers have to rely on themselves to save and the markets to make their savings grow. As we’ve seen over the past decade, the markets don’t always do us favors. Most investors, especially those nearing retirement, would have been better off putting that money into a bank account with little or no interest from 2000 to now. That would at least have eliminated the panic and emotional madness which most investors have been experiencing. Since we can’t predict what the markets will do in the future and trillions of dollars remain in retirement plan investments, the best we can do is hope for some real and genuine reform:
Of all the areas which deserve reform within the retirement plan industry, disclosure of retirement plan fees should be high on the list. Many participants have no clue about what costs they pay to participate in and maintain retirement plans. Those costs are well hidden beneath secretive “expense ratios” and blended into the daily pricing of many investments which we think is only reflecting market performance. Sneaky, sneaky! Fortunately, some members of government are working to resolve these problems by way of H.R. 2989 (The 401k Fair Disclosure and Pension Security Act). This badly needed legislation would do the following:
• Require 401(k) plans to disclose fees in one dollar figure taken from participants accounts in a worker’s quarterly statement;
• Require 401(k) service providers and plan administrators to disclose fees charged on 401(k) plans broken down into four categories: administrative fees, investment management fees, transaction fees, and other fees;
• Help workers understand their investment options by providing basic investment information, including information on risk, return, and investment objectives;
• Require plan administrators to offer at least one low-cost index fund to plan participants in order to receive protection against liability for participants’ investment losses;
• Require service providers to disclose financial relationships so companies that sponsor 401(k) plans can make sure there are no conflicts of interest;
• Ensure that if workers get investment advice through their jobs, that advice be based on the workers’ needs – not the financial interest of those providing the advice;
• Provide adjustments to pension funding rules to ensure plans can weather the economic crisis without being forced to choose between cutting jobs or freezing plans.
Something else which would greatly benefit retirement plan participants would be clearer rules on investment advice. As the system currently stands, most investment advice is provided by the same insurance and fund companies which administer the plan (basically wolves in sheep’s clothing as FA magazine so aptly calls it). Participants should recognize this clear conflict of interest and seek advice from independent, unbiased third party providers.
Any hope of serious reform depends to a large extent on what else is on the docket for lawmakers in the coming months. If health-care remains the focus, it means less time, attention and dollars dedicated to the retirement system. If Republicans win some seats in the mid-term election that could also stall retirement plan reform. No matter what, let’s hope the Department of Labor recognizes the awful position so many Americans are in right now when it comes to their retirement plans and tries to bring a little common sense into the system.
Questions or comments? Please e-mail me.
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