Don’t Blame 401(k) Plans

There was an article in the Wall Street Journal a few days back and it’s about how Baby Boomers are starting to realize that 401(k) plans fall short.

Too much is blamed on 401(k) plans. At their very worst, they have high fees, poor education given to participants, and mediocre funds. Even at its worst, it is still an effective tax deferral savings program for retirement.

While I have been critical about high fees, poor participant education, and mediocre investments, I still think it is one of the greatest developments in tax law in the last 30 years.  Where else can an employee stock away $16,500 a year on a tax deferred basis (with an additional $5,500 for those 50 are over)? With the addition of the Roth feature, the employee has the option to defer on an after tax basis and have tax free distributions after age 59 ½.

We have a retirement crisis in this country, but is that really the fault of 401(k) plans? Social Security may go broke as soon as it’s my turn to collect, but is it really an effective retirement savings vehicle. Defined benefit plans have gone the way of bellbottoms, but is that the fault of 401(k) plans? Defined benefit plans have been killed by the Internal Revenue Code and over regulation that have either made it easier for plans to curtail them or more difficult to maintain. Either way, it wasn’t the fault of 401(k) plans.

As far as saving in 401(k) plans go, they are like studying for the bar exam. Having taken and passed three different state bar exams (NY, MA, and CA), I can tell you that I studied hard for weeks at a time. I didn’t pick up the book the day before the exam and expect to pass. Passing the exam takes weeks of consistent, daily studying. As far as saving in 401(k) plans, they need consistent savings. Saving in a 401(k) plan isn’t for those who just turned 50. Just saving when you are near retirement is the ultimate financial error.

 When I was 27, I was finally a participant in a 401(k) plan and I started to save as much as I could (those days there were deductibility limits that limited what I could defer pre-2002). My mother, not a financial wizard, didn’t understand why I was saving for retirement, that it was for when I was older. As ridiculous as my mother’s advice was, I am sure that too many Americans don’t understand that saving for retirement has to take place over a 30-40 year period.

We can talk about all the problems that 401(k) plans, but I have yet to find anyone who complains about them come up with a better alternative. A government sponsored plan isn’t the idea, look what they have done with Social Security. I think fee transparency and plan designs like automatic enrollment or perhaps mandated automatic eligibility for the salary deferral portion of a 401(k) plan can enhance the retirement savings of countless Americans.

At the end of the day, with all the problems that 401(k) may have, it’s up to the individual to save for retirement. Let us stop blaming plan providers or mutual fund companies, let us take some personal responsibility first.

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16 Responses to Don’t Blame 401(k) Plans

  1. Donald Davret says:

    Counselor, you answered your own question: “At their very worst, they have high fees, poor education given to participants, and mediocre funds”

    Aside from the assassination, how was the play, Mrs. Lincoln?

    I have yet to see one of these retirement abbatoirs with LOW fees, DECENT education given to participants (if any), OR performing funds. These instruments serve only the people who offer and administrate them, and I am sorry if that is a hard truth to come to grips with. But that is the reality, and with our economy in tatters, this is not going to result in a happy outcome for a lot of people. We can ignore it, or fix it. We can be apologists for it, or work to materially improve things.

    This is a simple matter to discern: if you put $100,000 of income into one of these plans over the course of your working life, and you come out with less than that, there was no point to the exercise. At all. You don’t do it for the sake of doing it in order to salve your conscience that at least you were being proactive about your future. Devaluing your retirement money by 20 to 50% is not a redeeming factor of one’s life.

    No matter how hard I try, people are of the stubborn opinion that even a losing investment is better than no investment at all. That is simply not true.

    First, given the nauseating amount of administration fees and overhead these monstrosities demand, a firm should consider alternative plans that are simplicity itself in their application. MOST firms can easily do this. If not, and people are so lucky to be able to defer the larger sums permitted under the 401(k) umbrella, these plans CAN be structured to to work. But they won’t be, so long as Johnny Sales Manager at Mess Muttinal, AXE’a my Portfolio, or Prevential Insurance is pushing every punk in his sales force sweating his quota to milk every drop of fee production out of the hapless employee. And that means steering them to products that carve out more in fee to the punk, than to the employee, and the firms’ deliberately limiting investment offerings to those that can grind out maximum income for them at the employee’s expense.

    There are viable solutions to this issue. Life after career is one of the most important aspects of a person’s very existence, like marriage, career, child rearing , or contributions to one’s community. But the employees’ assets have been bled to an inch of their lives because the companies who offer these “plans” have a conflicting mandate with that of the participants.

    Facts are stubborn things. But that funny gorilla in those commercials wants nothing more than to pick your pocket, and he won’t apologize for the meagre income you’ll be stuck with once you have to actually live on it. But don’t worry- he’ll still be laughing.

  2. Donald Davret says:

    I can be reached at my e-mail address, which is ddavret@saxonysecurities.com. I will be happy to discuss your employees’ investment needs AFTER consultation.

  3. M. Folgmann says:

    Mr Davret,

    Clearly you miss the entire point of Mr Rosenbaum’s article and don’t understand the problem at all. The 401(k) is a shell that needs to be brought to life by the fiduciaries; they review and build the components. They can choose high priced funds or low cost funds; they can choose a record keeper that charges high asset based fees or low per particpant fees. ERISA sets the parameters and the fiduciaries can build a great plan or they can listen to wall street and get a “packaged deal”. They can ask for every dollar of expenses to be disclosed or they can choose to be 100% in the dark (our plan is free). When you allow plumbers, welders and roofers to run retirment plans; wall street will eat them alive and employees lose. When you get trained fiduciaries involved you end up with a low cost efficient plan. Its that simple.

    With this said it’s only 25% of the equation because as stated in the WSJ article the average employee will retire with only about 3 years of income accumulated but needs a minimum of 10 years income. Fees didn’t cause this; behavior did. Sign up too late, save too little, too many loans and job change and most employees believe they are qualified to manage a retirement portfolio (oh I lost half my portfolio in 08 and lets blame wall street). That’s as crazy as the plumber running the retirement plan. Get professional help and you will get professional results. If not; we all loose when a whole generation retires with 25% of what they needed to live out their life with dignity.

    The point is that it’s not the companies offering the investments and adminstration that cause the problem, it’s the employers that are “selecting” these companies that are the problem; no one can destroy your 401(k) if they are not selected. 401(k)s are not a product that can be bought and sold; a 401(k) is a retirment plan that needs funding vehicles and oversight selected by your employer to bring it to life. If the business makes good selections: it works and if the business makes bad decisions; it doesn’t. Its never wall streets fault!! Someone made the selection and that someone has fiduciary responsibility to act soley in the interest of the employees. Period.

  4. Reverse scanario: the majority our our clients have come to us later in careers with average $750-2mill in retirement accounts. the niche is folks in public higher education. They have mandatory 5% and 8% on 100% salary match. Problem: 90% of investable assets in retirement plan. Why? Financial “stewards” in this space (and financial services industry) pushes the 401k type plans to the max. Not the greatest strategy for all. Can we say “overqualification” of assets? Had folks saved outside of plans, been able to take losses/cap gains, find alternate asset classes, real estate, etc. Wouldn’t there wealth grown v. taxation at distribution/transfer of wealth?

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  6. Mike Alfred says:

    The truth is almost always somewhere in the middle. Another great piece, Ary. Thanks for posting.

  7. Donald Davret says:

    @ Mr. Folgmann:

    thank you for reciting a litany of what makes the 401(k) the worst possible retirement investment vehicle out of every other available option. You practically agreed with every point I made, but since this must be how your bread is buttered, you still presented it as a counterpoint. It is also a study in deflection.

    As we have already seen:

    1) Fiduciaries are mostly interested in protecting themselves, not maximizing return to the employee. The results show it, so I will thank you not to dispute it. These are not investment professionals we’re dealing with here.

    2) Fiduciaries seem to have an odd predilection for choosing the worst possible investment products, some of which even pay the salesperson more in commission and trail than the employee gets in investment return. As I said: “the firms’ deliberately limit… investment offerings to those that can grind out maximum income for them at the employee’s expense.” The choices they are given are execrable to begin with. Its FIXED that way, so don’t blame the fiduciaries who think a Fibonacci curve is a pasta side dish.

    3) If you’re going to blame the employee for mismanaging his assets, don’t you think it would be incumbent on the firms who milk the employees’ retirement portfolios for fee income to at least EARN IT by providing at least SOME investment guidance instead of dropping a book of mutual funds on a desk, and leaving Sadie the clerk and Moe the pipefitter to their own devices? The average 401(k) providers’ idea of “guidance” is showing employees how to fill out the forms properly. You know it. And I know it. That was the point of my argument, and yet, you framed this as a defense of the industry and tried to shift blame on the employee. The employee knows even less than the fiduciary does. And that is not the employees’ fault.

    And blaming “Wall Street?” Thanks for the laugh. I’m sorry, Sir, but your defense of the enterprise is quite weak in its logic. And that is because my experience tells me so.

    If you work for a company the size of a Proctor & Gamble or some huge enterprise, an employee has few options than a 401(k)other than to opt out altogether, which might be the wisest choice of all. For hundreds of thousands of smaller entities, these programs are wasteful, needlessly beaurocratic, costly, and opaque.

    And the results show it. This is a national scandal, with many complicit hands.

    • Susan Marler says:

      Mr. Davret,

      Your analysis of 401(k) plans is absolutely ridiculous. As one of the overpriced TPA’s in the world, let me say one thing….I have participants in plans that I administer who have hundreds of thousands of dollars in their retirement plans, thanks to their generous employers. If it weren’t for these “401(k)” plans that should be done away with in your opinion, these people would be living on social security in a few years….God help them!!!!

  8. Steve Weidman says:

    I believe that going into partnership with the government is a bad idea.
    Max funding a proper Variable life product would be my first choice.
    No 59 1/2 limit or other restritions.
    A 401k is better than nothing for the average person but a fiduciary should put the customer first then himself.

  9. M. Folgmann says:

    Mr Davret,

    Great it looks like we are in total agreement except for what we refer to as “The 401(k)” I’m not willing to throw the baby out with the bath water. It is still our best best for solving America’s retirment dilemma.

    #1. These fiduciaries are not professionals and need to be. We agree

    #2 The choices they are given are unacceptable therefore don’t accept them. Get educated and go into the marketplace and choose acceptable alternatives. We have plans with funds charging 07bps. We agree again.

    #3 No investment education can be delivered by salesman or this industry. Nor do I believe in invidual mutual fund choices by employees. All data shows they will implode. There are better alternatives. Since you state the employee knows even less than the fiduciary I would assume you agree with this premise also.

    These 3 changes would be a great start to improving the 401(k)s across the country. We probably can learn quite a bit from Mr Pollacks clients whom have their own issues even though they are not underfunded.

    Oh; by the way. My bread is not buttered by Wall Street. I hate Wall Street so much that I am embarassed to admit I operate within this industry but I also feel they have the right to offer and charge whatever they like. We just have the right to say “NO”

  10. Donald Davret says:

    Well, Mr. Folgmann,

    that’s quite a reform package you put together there. They are all constructive and commendable changes. But I see little chance of them being implemented anytime soon. Because so few have the incentive to do so.

    But one thing I would like to say is that for a great many companies that have fewer than 100 employees, they should jettison the 401(k) plan altogether in favor of alternatives that are far cheaper to administer, and allow for greater diversity and control over asset selection and portfolio management.

    The local equipment rental company, the ob-gyn practice, the law firm, the small restaurant chain, the kitchen and bathroom contractor, the computer servicing company, all of these small to midsized businesses have been gulled into choosing the most expensive plan out there thanks to the marketing muscle and branding power of the 401(k) industrial complex. There’s no need for that.

    At a stroke, they could rid themselves of the worst aspects of retirement planning out there, without kidding themselves that their mere participation in one is a key to their self-betterment.

    A great retirement crisis is unfolding before us. For some, the die is cast, and there is no rewriting one’s history. But there is a chance that many people will not have to suffer the fate of millions who participated in these fleecing operations, and partake in the retirement they rightly deserve.

    This has been a useful thread.

  11. Donald Davret says:

    @ Ms. Marler

    To which I might reply, “no doubt you would.” (Your analysis of 401(k) plans is absolutely ridiculous”)

    I never said the plans should be done away with. What I DID say was that they were the least desirable choice for the very reasons I stated, in detail.

    As a TPA, why don’t you tell us how much investment experience you have, and what training you have received to insure that plan participants are making the right investment decisions? What criteria are you using to select investment options for plan participants? That should good for a start.

    The Wall Street Journal article and my own experience contradict your statements.
    I am not making this this up, and I can promise you that the WSJ article will find ample resonance once people have been made aware how much they have been taken advantage of.

  12. M. Folgmann says:

    Oh my god. Did you really say your first choice is a Variable Life Insurance Policy to fund retirement income! I think you are on the wrong site!!!

    @Donald – Notice I’m calling you by your first name now. I think you are coming around. Check out Scott Simon’s Fiduciary articles at Morningstar and review the one on The Platinum Standard. New solutions are being created and implemented as we speak that will keep those small business in the retirement plan business without being in the retirement plan business. The solutions will never be created by the same people that created the problem (Wall Street) Its going to take you and me and thousands of others educating and creating great outcomes for small business. This can and must be done. Good Luck

  13. Donald Davret says:

    @ Mr. Weidman

    Know this: the ONLY beneficiary of an annuity is the person or the firm who sells one.

    My years of experience tell me this: LET INSURANCE INSURE.
    LET INVESTMENTS PROVIDE.

    The annuity product is a rip-off. With one government backed bond, I could provide far more income on a monthly basis, AND do it with far greater security than that of any insurance company. I have yet to meet one person who was satifisfied with the performance of their annuity. Have fun with the surrender fees, though.

    The SEC also warns: “Am I being urged to purchase a variable annuity or variable insurance in my IRA, 401(k), or other retirement account?

    One key benefit to purchasing variable products is the fact that earnings on the invested money accumulate tax-deferred. But these tax benefits are of no value if you’re purchasing the product in your IRA, 401(k), or other retirement account because those accounts are already tax-advantaged. Make sure that the features you’re buying are worth the money you’re paying.”

    In other words, you’re promoting a practice the Securities and Exchange Commission finds unseemly. Congratulations.

    Anyone else? I’m in a dancing mood today.

  14. Donald Davret says:

    By the way, Mr. Weidman. You wrote “funding a proper Variable life product would be my first choice.”

    It is bad enough that you would push a product like that into a 401(k). After all, you’re trained to sell, and if you don’t, there’s the sidewalk.

    But for your TPA and/or compliance officer to sign off on such a practice speaks volumes of the kind of oversight and degenerate practices I spoke about at the beginning of this conversation.

    No doubt Ms. Marler would like to chime in on the level of due diligence performed by these selfless guardians of the plan participants’ welfare.

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