The Bakersfield Californian
March 4, 2011
The 401(k) generation is retiring with savings plans that are falling way too short.
And if that news isn’t bad enough, try this: Many 401(k) plan managers have conflicts of interests. They charge fees, offer advice and direct funds more for the managers’ benefit than for the investors’.
Those aren’t my conclusions. Those are the findings of two recent studies: an analysis of Federal Reserve data by the Center for Retirement Research for The Wall Street Journal; and a report by the Government Accountability Office.
Interestingly, this scathing criticism comes as the drum beat gets louder to move millions of public employees throughout the nation from “defined benefit” pensions to tax-deferred 401(k) plans. This means that an increasing number of American workers will be relying on these plans to support themselves in their old age.
According to The Wall Street Journal, the median household headed by a person aged 60 to 62 with a 401(k) account has less than one-quarter of what is needed in that account to maintain its standard of living in retirement.
Partial blame can be placed on the boomers, themselves, who were slow to contribute to these plans.
But the worst recession to hit this nation since the Great Depression wrecked havoc on retirement savings. As the economy melted down and Wall Street investments vaporized, boomers watched their 401(k) plans become what some jokingly called 201(k)s.
In the past two years, investments have rallied, but not enough to restore retirement nest eggs and the dreams they were supposed to finance.
And with the recovery providing sparse job creation, many laid-off boomers stopped contributing to their 401(k) plans. Some were forced to withdraw money just to survive.
“The problems are widespread, especially among middle-income earners,” The Wall Street Journal reported. “About 60 percent of households nearing retirement age have 401(k)-type accounts, according to government data, and those represent the majority of most people’s savings.”
To make matters worse, the Government Accountability Office is warning that some of the managers American workers must rely upon to safeguard what little retirement funds they have are not being good stewards.
According to the GAO, some 401(k) plan managers have conflicts of interest involving undisclosed “revenue sharing.” They receive fees from fund managers and others, who pay to be included in the plans. And under the guise of “educational services,” some 401(k) plan managers are misleading workers.
The Los Angeles Times provided an example of how this “education” gimmick works: “A 401(k) provider might suggest broad types of funds based on an investor’s age and risk tolerance. They don’t name any funds, but the only way for an investor to follow the advice would be to buy a handful of specific funds.”
“Participants who confuse investment education for impartial advice may choose investments that do not meet their needs, pay higher fees than with other investment options, and have lower savings available for retirement,” the GAO warned.
The GAO is recommending that the Labor and Treasury departments adopt regulations that will require 401(k) plan managers to disclose conflicts, fees and other costs.
Meanwhile, what is an investor to do?
- Don’t give up. Keep contributing to your 401(k) plan. Financial planners have traditionally advised people to contribute 9 percent to 12 percent of their salaries, including the employer contribution, into these plans. Because of weak stock returns and uncertainties about the future of Social Security and Medicare, workers are urged to increase that amount to 12 percent to 15 percent.
- Do not “borrow” money from your 401(k) plan. You are only digging your retirement hole deeper.
- Understand your plan. Most 401(k) plans have Websites. Sign up. Learn about investment options and fees, and check your accounts online. Check independent websites that rate the performance of investment funds.
- Become an activist. Companies offering 401(k) plans are legally obligated to operate the plans in the workers’ best interest. Typically, a company representative or committee serves as trustee and fiduciary to enforce plan rules. Become a committee member. At the very least, find out who is running your company’s plan.
- Regularly monitor your investments. Conventional wisdom has been to “invest for the long-term” — buy a stock and hold onto it. The value may go up and down, but in the end, you will make money. However, in the current volatile economy, it may make sense to dump an under-performing fund.
- Determine your “risk tolerance.” Younger workers can risk investing in “riskier” funds. They have many years to recover losses. Older workers have less time to recover.
- Diversify. Spread your investments into a variety of funds to provide a cushion.
- Treat your 401(k) account as just one part of an overall retirement plan that also includes separate pensions, Social Security, real estate, savings and others investments. Work with a financial planner, stock broker, accountant or attorney to develop this plan. Use the adviser as an independent pair of eyes to examine the performance of your 401(k) account.
The bottom line is to be proactive. There is no time like the present to roll up your sleeves, dig in and take control of creating a plan for retirement.