Ever since an article was published in the November 19, 2009 issue of Time magazine entitled “Why It’s Time to Retire the 401(k),” much has been written about the overall poor performance of these retirement plans. Are they really the terrible investment vehicles that some of these pundits claim? Definitely not, but they do have their faults.
Company sponsored 401(k) plans provide the average working person an excellent way, for some folks the only way, to invest for retirement in particular and wealth in general. Even without a company match, the tax-free investment aspect of these plans is very powerful. But let’s talk about those bad points that have been written about so much lately.
– Costs and fees that are associated with these plans are recurring criticisms with the anti-401(k) crowd. No argument here. Fees and expenses affect your portfolio’s performance whether you invest in a 401(k), an IRA, with a personal financial advisor – there are always costs associated with investing. Are some plans more costly than others? Yes, and you need to know exactly what those costs are.
– Quality and/or quantity of fund choices in some plans are hot topics of dissent among the “Kill the (k)” crowd. Again, no disagreement. As with costs, the baskets of funds available to investors in their plans vary: some are better than others. All plans are not created equal.
– Harping point number 3 is investment return. According to the Time article, the average 401(k) balance at the end of 1998 was $47,004. At the end of 2008, the average balance had dropped to $45,519. That’s definitely not the kind of performance needed to retire anytime soon, right?
What to do? Take control of your plan, that’s what. Step out of the 401(k) fog that most of us seem to walk around in and get busy. These plans don’t manage themselves!
Start with the first 2 points: costs and fund choices. Open a new browser window and pull up www.brightscope.com and register (it’s free). Type in your company’s name and this website will enable you to see how your plan stacks up against others in your industry or other plans in general. Are your plan’s administrative costs above average? Are your individual funds’ expenses above average? Is the quality of your fund choices below average? If so, get together a group of like-minded fellow employees and petition your plan administrator. They can and do make plan improvements if enough participants request them.
Handling point number 3 is all up to you. You’ve got to learn when to be invested and when to be “on the sidelines” (all in cash and bonds). Stocks and bonds constantly cycle between long-term bull and bear phases and being aware of these phases can keep you on the right side of the market. During that 10-year period that Time refers to there were 2 bear phases and 1 bull phase during which you could easily have adjusted your portfolio, vastly improving your bottom line.
While learning how to identify these bull/bear phases does take some effort, it’s not as hard as Wall Street would like you to think. The amount of educational information available through various media (books, magazines, the internet, etc.) empowers you to expand your knowledge to whatever degree you desire. Even a basic understanding of how to manage your investments can make a world of difference to your portfolio over time.
Keep it simple: buy the Monday issue of Investors Business Daily every couple of weeks to keep up with market direction. Dig a little deeper: take advantage of educational material available on the internet to get a broader understanding of the markets. Yes, it’s boring. Yes, it takes some effort. But hey, it’s your money. You work your fanny off 40 to 60 hours every week earning it – isn’t it worth 15 minutes a week to take care of it? You bet it is.
The 401(k) retirement plan doesn’t need to be scrapped – it just needs to be taken off cruise control. The vehicle is fine, but the driver needs to wake up and watch the road!
The defense rests.