For the average working family, their 401(k) plan is the second largest asset that they own, aside from their home. It provides them with an opportunity for future savings and a substantial source of income during their retirement years. In some cases, a 401(k) may be the only plan for retirement that a family has for this milestone in their lives. Unfortunately, many 401(k) plans have failed their participants for a litany of reasons.
A company establishes a 401(k) plan strictly for the benefit of their employees. An attractive 401(k) will make a company more competitive when looking for new employees. Many plans will encourage savings by offering matching contributions up to a certain percentage. Unfortunately, many of these same plans have failed to provide their participants with the necessary guidance that they need for a successful retirement, which could be devastating to their futures.
A common trend in the 401(k) industry over the last 2 decades has been the creation of an investing “Easy Button.” One way this perception as been advanced is through the sales of Target Date Funds such as “Retirement 2020” funds. These funds serve more as products and less as investments. The idea behind offering these funds is simple; if a participant can easily see the fund that is most closely catered to their retirement goals, then the advisor does not need to be present to assist in a self-explanatory choice. If participants were being approached regularly by their advisors, they would know that these funds tend to have a high exposure to bonds, which is a foolish investment when interest rates are at historic lows. If advisors were doing right by the participants whom they are privileged to serve, they would offer a vast array of products and make themselves present on a regular basis to explain the pros and cons of each investment. Sadly, few participants know what funds they are even invested in, let alone who their advisor is.
We have been warning 401(k) sponsors and participants for months to keep an eye out for fee disclosures that regulators have told advisors to release by August 1st, 2012. Many participants do not know exactly how much they are paying in fees and what these fees pay for. It is our own opinion that once plan sponsors and participants receive these disclosures, they will be appalled by how high their fees are, how their fees have been layered to appear lower, and by how much their advisor is earning while rarely making an appearance to answer their clients’ questions. These fees are often negotiated without the participants having a say in how much they should pay or what the fees go towards.
All 401(k) participants should do their part to educate themselves if they are feeling neglected by their plan advisor. Seek the advice of an outside professional; many will even sit down with you and explain what you have free of charge. If you are wary about looking for advice outside of your plan, speak with your Human Resources Department and ask them for assistance. If your co-workers feel the same, voice your frustrations within the company. Remember, these plans exist for your benefit. If you do not feel that you are benefitting, then it is time for a change. Plan advisors and administrators can usually be changed with minimal work on the part of the sponsor within 1 month, if done properly.
In today’s economic environment, your 401(k) is an incredibly valuable asset that requires careful attention in order to maximize your future earnings. Take a moment, whether it is on your own time, with HR or with another professional, and analyze exactly what you have, and if it meets your expectations. If you are unhappy with your fund options, service or fees, it might be time to start asking questions and seeking better answers.