Fixing the 401k Problem

The 401k industry is in a pretty sweet spot. Corporate pensions are quickly becoming obsolete and now more than ever employees need to rely on their own ability to save money. What could be easier than an automatic payroll deduction plan such as a 401k or 403b which provides tax-deferred growth and in some cases an employer match? Many people I know who really don’t have much investment savvy accept the 401k as one of those investment programs which they need to sign up for and that’s all there is to it. Sounds a little hasty, right? Well, according to a 2008 survey discussed in the November, 2009 issue of Registered Rep magazine (Introducing 401k 2.0), about 77% of 401k plan participants claim to have little, basic or no level of investment understanding. And despite Department of Labor requirements regarding improved efforts to educate participants, the reality is that many people simply don’t have the time or energy or desire to educate themselves about stock and bond investments. What they really need is good advice—a person or team of people whom they can reach out to on short notice to provide specific advice relevant to each participant’s situation.

As an advisor, part of my concern regarding the 401k industry stems from its complexity. Because of my experience administering and monitoring retirement programs, I’m fairly knowledgeable on the fees, expenses, investment options, service issues, tax issues and economic factors related to 401k plans. I’m also current on the issue of after-tax (Roth) contributions which have been all the rage lately. The way I see it, a 401k plan participant should be not merely be given an enrollment document and left with a pen to check off boxes. The concept of “auto-enrollment” is good only in that it encourages greater levels of savings. It’s dangerous in that ordinary investors could be making hurtful decisions in terms of their own tax consequences, liquidity needs, tolerance for risk, etc. I think a 401k enrollment application should be filled out by an employee with an advisor present who doesn’t have any conflict of interest (i.e. getting paid by) the retirement plan.
The 401k industry has traditionally been led by Wall Street. 401k is “product” which is actively sold to the tune of trillions of dollars to millions of Americans. It’s time for us to move the focus away from the profits of large and financially comfortable firms and onto the needs of the participants, many of which face a looming retirement crisis. With the first round of baby boomers starting to retire, the advisor community needs to band together on the issue of not letting retirees outlive their money. And while honest financial professionals deserve to get paid for their time and knowledge, they’ve got to remember that serving their clients objectively should be the #1 priority.
As always, feel free to call or e-mail me with any questions or comments.
Russell Bailyn

Wealth Manager
Premier Financial Advisors, Inc
14 E 60th St. #402
New York, NY 10022
P: 212-752-4343 *231
F: 212-752-7673
Securities and certain investment advisory services offered through: First Allied Securities, Inc., a registered Broker/Dealer. Member: FINRA/SIPC. Premier Financial Advisors, Inc. is a Registered Investment Advisor. First Allied Securities & Premier Financial Advisors are not affiliated entities.

2 thoughts on “Fixing the 401k Problem”

  1. I have read a number of 401K plans lit. I have never seen one that discussed dollar cost averaging. Few even discuss asset allocation. Many push their employees into target funds which are in my book not the best.

  2. Good point. I’ve seen some 401k plans which offer automatic rebalancing to participants. However, many 401k providers try to push asset allocation (target date) funds as a catch-all solution for rebalancing and proper asset allocation. You are right in that these funds are sketchy at best. I much prefer building a portfolio with 4-5 funds and tracking your own performance and doing your own rebalancing. During the recession some of these asset allocation funds which should have been in “conservative cycles” lost 20-30%.

Leave a Reply

Your email address will not be published. Required fields are marked *

× five = 25

You may use these HTML tags and attributes: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <strike> <strong>