If you haven’t seen it, Frontline produced as “must watch” documentary on America’s retirement crisis. It’s about an hour long and for the vast majority of people it will pay – in spades.
My mission here is to educate you on why you probably need to complain to your employer about how you’re likely getting screwed and forced into unacceptable risk profiles.
I’ve seen literally hundreds of 401(k) plans and very few of them really provide for a practicable way to manage risk. Here are some common characteristics that you should work to change.
A) Most plans restrict how often you may move in and out of an investment. Most plans I’ve seen have a 60 – 90 day minimum holding period for mutual funds. The rationale is to keep administrative costs down for the plan. The result is that if there is a major market event you’re forced to ride it.
B) Most plans have a limited and almost unintelligible selection of (expensive) “mutual fund only” investment choices. As the Frontline documentary shows, the names of the funds are useless in understanding the risk.
C) Very few plans provide the ability to own exchange traded index funds (ETFs.) Unlike mutual funds, ETFs allow for intraday trading and offer more protection by the ability to put stop loss sell orders in place to protect you from violent market volatility.
D) Very few plans allow for self-directed discount brokerage accounts from which you can buy low cost ETFs, individual stocks and bonds or manage risk strategies through the use of put options.
The 401(k) industry has become the milking cow from which Wall Street 1.0 transfers wealth from the working class to themselves. Employers may or may not understand the raw deal they are giving you in regards to protecting your assets. My experience inclines me to think that employers adopt most plans because they were pitched by someone in their social network and very little comparison shopping is done. This is especially true for smaller companies. Large employers often choose plans that are introduced by their investment banks where, too, the benefit to the employee is a secondary consideration. It seems the attitude is that once the employer has made their matching contribution – if they do math – they think “we’ve done our part, the rest is up to you.” Then the plan design prevents you from doing what you should under the heading of good risk management. It’s a shame, really.
If I were the ruler of the world I would have all of you watch the Frontline piece with pen and paper in hand to jot down questions that arise from it for you. Secondly, I would have you all look at the four additional issues I listed above and compare them against your plan and, if your plan is typical of what I see, start talking to you co-workers about it, get them to bring these issues up along with you to your human resources department, and demand that they adopt a plan that includes a self-directed discount brokerage option. It’s OK to be “on your own” with investing if you have the tools to do it.
Workers of the world unite!