It seems to me a lot of the conversations these days about ‘reform’ are really more of a way to get people to act a certain way, invest a certain way, or own a certain product, rather than promoting ideas that solve the underlying problems. Regulating behavior, rather than teaching how to fend for oneself.
Pundits and politicians are proposing ways to ‘fix’ the 401(k). Two ideas working their way through Congress and the administration include attaching annuities to 401(k) plans and regulating investment advice for participants.
But do these ideas fix the problem? Are they even necessary?
Many advisors think the above regulations offer little benefit, and may have the potential for significant confusion for savers.
Sure, the 401(k) plan isn’t perfect, but what I wonder is how the above changes answer the following questions participants have:
• How much should I save and where? Do I save more for retirement, or an emergency fund, or perhaps a home down payment fund? Do I save more or payoff debt?
• More than simply knowing how much risk I think I may want to take, how do I invest based on my goals, personal risks and emotional tolerance? What is the tradeoff I may face in investing for higher returns and my goals? Do I need to take on market risk, and if not, how do I make sure my savings keep up with inflation?
• Is my 401(k) working in concert with my overall financial plan? My estate goals? My other investment accounts?
The 401(k) itself is not a problem. It is just an account, and since it has been introduced savers have become wealthier than past generations by being allowed to take control of their savings. But, with that opportunity comes personal responsibility.
Below are my two cents in the conversation to improve retirement plans:
Focus on planning, not products
Mandate that participants can access their qualified plan money at any age to pay for financial planning services and advice. This advice includes, but is not limited to, investment management. Proposed legislation focuses on investment management and investment products, which, from a planning perspective, stem from the financial plan. The above questions savers need to address are not investment management questions as much as they are personal financial planning questions.
Thousands of advisors would offer advice if they were allowed to be compensated. The financial plan dictates the investment plan, and therefore investment funds should not be held hostage, only to be used for services that place the cart before the horse.
In addition, offer tax breaks for companies who pay for financial education that is independent from the investment custodian. Upstart financial companies offer education-only services to employees; these companies are not seeking to invest your money for you, but to teach you on how to do it yourself, or refer you to someone to work with (in other words, they “teach a man to fish”). A financially savvy workforce is also a more productive and loyal workforce.
The 401(k) model as currently structured traps participants into the investment options one provider allows.
On the other hand, we work with 403(b) plan participants whose plan options and services are a significant improvement over any current 401(k) plan. The reason? Competition for plan participant dollars.
These 403(b) plans offer: the choice of multiple plan providers, lower cost investment options, and the ability to pay for investment management to an independent advisor. The result is a participant has the ability to pick the provider that is appropriate, at a lower cost, and can work with an advisor on their comprehensive investment plan.
Until the day the 401(k) is required to offer more consumer-friendly benefits, what you can do as a saver is keep an active dialogue with your employer or human resources department about your plan. Make sure they are aware of your concerns about costs, limitations, and investment options their provider offers. Your retirement savings plan is, after all, an employee benefit.
Originally published April 5, 2010 at the Financial Planning Association’s All Things Financial Planning Blog