Working out the 401(k) Kinks

When Honda unveiled the 1986 line of Acura cars, it was one of the first entrances of the Japanese Auto industry into the luxury market of cars. While the cars were impressive, they were initially beset by factory defects. Eventually, Honda was able to work out its kinks on Acura and it became the most successful Japanese luxury car brand until the rise of Lexus. Based on that experience, I learned not to buy the first year of a new model or car redesign to ensure the kinks are worked out.

In the 401(k) market, when there is a new product introduced, the financial industry and the third party administrators embrace the product without seeing if the kinks were worked out. The perfect example of this was the introduction of target date mutual funds. The mutual fund industry thought that the target date funds were the cure for participants who were overwhelmed by the many funds that were offered for participant direction. Target date funds were supposed that one stop shop that a participants could rely on, to take them into retirement as the fund would recalibrate to a more fixed income tilt as the fund reached the retirement target date.

As well know, the kinks of target date funds weren’t worked out. The bear market tested out the kinks and the kinks were terrible. Participants were unaware of their large equity exposure in many funds and there was a wide variety of equity exposure within the target date funds offered by mutual fund companies for the same specific retirement target date.

So my point is that the 401(k) industry will churn out new products to help with retirement savings, just make sure the kinks are worked out before you invest in them.

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