Is your 401(k) a clunker?
You probably already know you’re in the driver’s seat for funding your retirement. Here’s how to tell if you’re in a good plan — and what you should do if you’re not.
First the good retirement news: New legislation makes it likely more Americans will be swept into the 401K system, providing greater financial security for them and a profit windfall for the financial-services industry. Now the bad news: This doesn’t help you out one bit. You’re already in the system, and for you, nothing has changed. Unless you’re in a gold-plated plan — and even in the Fortune 500, that can’t be taken for granted — you’re stuck with a tin cup.
“The 401(k) industry is a racket. It’s rigged in favor of employers and with fees that are excessive, investment alternatives that are lousy and with nobody around to help employees avoid dumb mistakes. Sorry to tell you… And corporate plans are Hertz compared with the rent-a-wrecks available to the public and to employees at nonprofits, including a large number of teachers. Their plans, known as 403(b)s, often feature high fees and terrible choices.
Retirement benefits of some kind are a tradition in the United States. But they are voluntary, and businesses with fewer than 100 employees are least likely to offer them. Corporations began decamping from pensions in the 1980s, claiming government regulation made them too expensive and unpredictable.
Defined-contribution plans like 401(k)s can cost employers nothing, although many companies subsidize their expenses and offer to match a portion of employees’ contributions. Until last year many workers, especially young and poorly paid employees, never even enrolled in the plans that were available.
The pension protection Act of 2006 changed that by allowing plans to enroll employees automatically and to gradually increase their contributions unless employees specifically opt out. It also allows employers to offer more investment guidance.
A huge fraction of 401(k) participants know nothing about investing and have tended to choose the worst options — lowyielding stable value accounts and risky company stock. Since last year, more and more plans are offering target-retirement funds and making them the default for new enrollees.
This is good because it gives plan participants a better shot at making significant investment earnings, and therefore creating more retirement income. “You automatically go into an age-appropriate asset allocation, and that allocation will change over time, better balancing the risk and return of the portfolio.
I want to finish by explaining that nothing is wrong with investing for retirement. Whatever plan you select is good. Participating in a plan is better than doing nothing. We all have choices. We all have thoughts. Choose the good ones…