What Do You Know About Your 401k Plan? In Planning For Your Retirement, Ignorance is Not Bliss
I bet many of you have no idea of the things that are going on “behind the scenes” in your 401k plan. Do you want to hear something even scarier? I bet many of the people that are IN CHARGE of the 401k plan at your company don’t know the things that are going on behind the scenes in your 401k plan. The corporate retirement plan business is a big money business! Why do you think the “big boys” of the financial industry dump so much money in to marketing? To make sure that they get the lion’s share of this money into their coffers. Heck even if they make a fraction of 1% in profits, that’s still a huge chunk of change if you can get the dollars of all of the contributing employees of a few Fortune 500 companies to go with your plan.
This is before we also factor in all of the administrative costs of recordkeeping, IRS compliance, and countless other factors involved in making these plans work. There’s A LOT of money to be made. Unfortunately, whether or not the people who are actually contributing and counting heavily on these plans are successful (people like yourself) is more of a secondary consideration instead of the primary consideration. The investment companies don’t ensure that they’re offering the best investments for the money on their platforms. If it’s a situation where the various investment managers pay to have their funds on a particular retirement plan platform they’re not going to tell you that the manager is mediocre at best, and that you’d be far better off investing in an index fund at a fraction of the cost, and get better performance to boot.
Another important fact is that while many of the larger companies have good or even great retirement plans, these same plans are NOT beating down the doors of smaller and medium size companies, those that make up the majority of American business, because the profit potential isn’t as good. Many of these plans are left to local banks, brokers, and insurance companies and there is almost always an extra layer or two of expenses in these plans, and high expenses kill retirement plan values.
Getting back to the investments, who is guiding the people that invest in their 401k plans as to proper investment practices? Does anyone come in and tell the people that while the fixed investment option in many plans are great from an investment risk perspective, it’s more than likely going to get killed by inflation? I don’t think you need to be a math major to figure out that if you were counting on continuing to pay the $1.71 per gallon of gas when you retired at the beginning of the 2000s, for instance, that when the price more than doubled last year it caused more than a little concern. But when the money is flowing in to a company’s funds and they’re making money, why bother telling the people that this tactic might not be the best one for them personally in the long run? How many people are aware of Harry Markowitz’s Pulitzer Prize winning research, Modern Portfolio Theory? How about the methods that the large institutional managers, like those at Harvard, Yale, and Stanford use to invest their millions and billions?
From the beginning of when market performance data was first recorded until now, the research shows asset allocation is the prime determinant in success in investing, not the individual investments themselves and not trying to time moving in and out of the market. This holds true through recessions, depressions, world wars, Arab Oil Embargos, you name it. In fact, in an efficient market like the U.S. Stock market, information is being conveyed and acted upon at blistering speed, so much so that that it’s very, very difficult for any one person/active money manager to gain an edge over any other, measuring over a long period of time. One of the greatest investors of all time, Benjamin Graham, before his death in 1976, stated that technology is too good for the value investing that he made popular in the beginning and middle of the century, to work in modern times, and this was in 1976! Back in those days computer technology meant using an Apple IIe to make Mr. Bojangles do jumping jacks. Can you imagine his thoughts today with the progression in information processing that took place over the past 30 or so years? Sadly, if you polled most 401k participants today, the ones that know proper asset allocation would be the exception, and the norm would be those holding 5 or so funds invested in the same stocks, or, worse than that, those that have all of their funds invested in a fixed income (i.e. “safe”) fund.
What happens to your plan if you should meet an untimely demise? If you’re married it should pass to your wife or husband without a problem, but what if you’re not married, divorced or widowed? What are the provisions for a son, daughter, or other “non-spouse” beneficiary taking the money out? Can they do a “trustee to trustee transfer” to a “Beneficiary IRA” or are they forced to take an option more lucrative for the IRS than themselves? Options such as a lump sum distribution, or be forced to take all the money out at the end of five years? The Pension Protection Act of 2006 made things much better for non-spouse beneficiaries, but did your plan include language to make itself compliant with the P.P.A. of ‘06?
A final issue to take into account is taxes. Since the money you’re contributing to your 401k is all “pre-tax” money (i.e. Uncle Sam didn’t take his cut out at that time the money was earned). Uncle Sammy is going to want his fair share at SOME time. Definitely by the time you reach age 70 1/2. Does your plan account for how much you will need to live on in retirement count on the fact that taxes, in some cases as much as 35%, using today’s tax rates, will be withheld. But there’s no guarantee that those rates are going to be the same when you retire, especially with the shortfalls in Social Security and Medicare, and ALSO the government may be getting into the healthcare business in addition to being in the automobile and banking businesses. SOMEBODY has to pay for this stuff since the government doesn’t have any money of its own, it gets its money from its ability to tax its people (a fact I have trouble convincing some people of.)
So what can little ol’ you do? Well, first you can ask the person at your company in charge of your plan if the plan has ever had an objective analysis performed on it to evaluate expenses and fund performance. If not, get one done. While we at Halas Consulting would be eternally grateful if we were the chosen ones, even if you don’t choose us (God forbid!) make sure you choose an independent Registered Investment Adviser as they are currently the only ones who are required by law to always act in your best interests. An analysis will show plan expenses vs. average, as well as fund performance vs. an objective index, such as the S&P 500 in the case of stocks. If you’re given a hard time by your company representative, it might help to remind them that the people at your company whose names are listed on the plan as being in charge can be held financially liable PERSONALLY if it’s discovered by the U.S. Dept. of Labor that the company plan is gouging the employees with high expenses. How could this happen? Well, if someone got disgruntled after being fired or laid off, this is one avenue that the someone could use to raise a stink and cost the company time and possibly money in fines. Rumor has it that if you thought an IRS audit was bad. A Dept. of Labor audit makes an IRS audit look like a summer day in the park.
Next, start asking questions, and have your co-workers start asking questions about the plan. If the people in charge know that it’s an area of concern, they might make checking the plan in detail to be put on the “front burner.” Without attention, it will probably kinda get lost in the shuffle of day to day things. As in most cases, the squeaky wheel gets the grease. Third, have your financial adviser (or better yet, Halas Consulting) check out your current asset allocations. A review can be performed using a software investment analysis program like Morningstar Principia, which many advisers have. One of the more important components of the Morningstar program is the ability to analyze the stocks in various funds and check them for overlap. A review will also tell you if you are too heavily weighted in cash or bonds if you’re young, or too heavily weighted in stocks if you’re older, either thing is just not a good thing. You could also get a copy of your 401k’s Summary Plan Description ,and have your adviser analyze it, or analyze it yourself if you have a strong stomach and don’t fall asleep easily, but I warn you, it isn’t a fun read.
This article comes with a homework assignment. In your spare time I want you to go to Youtube www.youtube.com and in the search box at the top of the page type in THE TRUTH BEHIND HIDDEN FEES IN 401K PLANS and watch the 3 part video documentary expertly done by Bloomberg. If you’re never seen this before, you will find it to be quite an eye opener and will give further credence to things I wrote here and in my previous 401k article.
For most people reading this, the 401k is the vehicle that will provide you with the majority of your retirement income, and possibly be the highest value asset that you own. With all of the money that you’re more than likely contributing to it, I think you’ll agree that it is NOT something that should be left to chance and hope. Resolve today NOT to be an uninformed bystander in your financial future.
At Halas Consulting, we’re a lot like our clients. We don’t drive around in Cadillac Escalades to give the appearance of success, we drive Hondas because they’re one of the best values for the money. We buy good foods that are on sale that week at the supermarket, and we review our Pennysavers weekly to find out who wants to sell us something good for a low price.
In the advice business we are always doing research to find the best solutions at the best prices, and experimenting with different asset allocations to try and determine how a given portfolio will perform for our clients in the best and worst market conditions.
Whether it’s helping our clients with their investing, insurance, banking or tax needs, we are always looking for find the best product at the best price. While we also have to make money to pay the bills, we don’t have lifestyles and overhead such that our expenses are so high it hampers our clients ability to achieve what they hired us for: financial peace of mind.
If this way of doing business sounds like a refreshing change, feel free to email Halas Consulting at chalas@venn.us and check out the website at our Registered Investment Adviser http://www.venn.us
