401k & 403b Plans, Failing The Participant

401k Plans & 403b Plans, Failing The Participant

     by: Brendan Magee

Most people realize that as far as your retirement is concerned, you are on your own. Social Security currently covers maybe 40% of your working income if your lucky. You, and you alone, will be the  left to take care of the remaining 60%. Hence, the 401k plan or 403b plan grows in their importance to the American worker. 

In retirement, the American worker's financial security will depend on how well they have invested in their retirement plan. At the moment, the workers are losing that battle in a big way. Dalbar's Inc. runs an annual report on how well or poorly investors are doing. Over the last 20 years, the average stock mutual fund investor's annualized return was 5.02% vs U.S. Large Company Stocks which did 9.22%. Bond investors did even worse. The Barclay's Bond Index did an annualized 5.74% vs the average bond investor who did a measly 0.71%. 

The task gets even harder when the investments being provided to 401k and 403b plan participants are universally substandard. It also doesn't help when that lack of good investment choices are brought to the attention of the plan sponsors and it falls on  deaf ears. The sponsors in smaller companies could be the owner for the company and in bigger organizations they could have a separate department handling the running of the retirement plan.

I had two such frustrating experiences recently. The first, occurred when an employee at a school district came to me with concerns about the returns on her 403b account.  In 2014 on an account which had an $8,000 balance, her return was just $80 which is a return of just .000875%. By comparison, U.S. Large Company Stocks did an annualized 13.69%. This young lady was woefully falling behind the rising cost of living.  The worst part of it was that the other investment options in the plan hadn't performed all that much better than the investment she was in. 

When she found better investment options than her plan offered and asked her school district's business manager to add her preferred investments to the plan,  he told her to just use one of the other investment options already in the plan. In other words I have no clue about the school district's retirement plan and your concerns are of no importance to me. So frustrating!

The second situation occurred when a 401k plan participant came to me and wanted some help investing in her company's new 401k plan. The company was offering mainly target dated funds where the participant selects options that are designed around when you feel you will retire. There are various options where portfolios are specifically allocated for people retiring in 30 years, 20 years, 10, 5. etc.

When we looked at the various portfolios, the participants money would only be diversified amongst four different investments with any where from 40% to 60% going into U.S. Large Company Stocks. Still feeling the effects of 2008 where U.S. Large Company Stocks dropped by almost 40 percent, the participant wasn't feeling secure with her investment options. 

So here we were in a plan that was fundamentally flawed. With only four asset classes represented in the portfolio and being overly concentrated in U.S. Large Company Stocks there was a lot to be concerned about. We arranged a meeting with the person in charge of retirement plan benefits for the plan and showed him that as it was the plan would create a situation where the participants would be taking way more risk for the expected rate of return for each portfolio being offered. We also show that in some cases the participants would be out hundreds of thousands of dollars in expected rate of return as a result of the lack of diversification in the plan's portfolios.  It was a pretty much cut and dried analysis placed before the benefits manager. 

His response was there were administrative issues that required them to stay with their current plan and no changes would be made to the plan for the foreseeable future. In other words, I do not want to add to my work load no matter how much the participant's financial security is being compromised. 

The truly sad part is that these are just two people amongst millions who have had their eyes opened to how bad their company's 401k/403b plans are. There are millions who have no idea that they are pouring money into plans that will only make it harder and harder to afford retirement, and that the plan sponsors are not interested in solving their problems.

So what's a 401k or 403b plan participant to do? Not participate? Get further behind in the race to build up a sufficient nest egg? Neither of those options are optimal. Most likely, you continue to participate in a bad retirement plan. In most cases the participant is left completely in the dark as to how substandard their retirement plan truly is. The realization only comes when retirement approaches  and they realize they do not have nearly as much money as they needed.

 As in the words of one of the plan sponsors I met with "We are not eager for our employees to find out we have a bad plan." 

The only winner in this is the investment companies. They are brought in to invest people's money and are left unfettered to collect their fees and build huge profits from commissions. The participant doesn't win because it becomes more difficult to impossible to save enough money to retire. The company doesn't win because they are paying for the administration of a substandard plan that none of their employees can feel good about. The solution will only come when the sponsor is bothered enough by wasting money on bad plans. When that comes, your guess is as good as mine.

Brendan Magee is the founder and president of Inevitable Wealth Coaching. with questions or comments e-mail brendan@coachgee.com or call 610-446-4322.

The Questions Not Asked, The Decisions You Don't Get To Make & The Toll They Take On Investors

Questions Not Asked,  Decisions Not Made, 

& The Toll They Take On Investors

                              by: Brendan Magee

Last week, I was having a conversation with a very nice man during which I asked what he did for a living. He informed me he was on his second career. He retired a view years back after the company he worked for downsized the work force and he wound up as one of the casualties. Being close to retirement, he and his wife decided they had enough money to last the rest of their lives and it was time to start enjoying their lives.

Things started out o.k., but along with 2008 and the company's downsizing came the stock market crash. In a bit of a panic, Tom called his financial adviser and told him he wanted his money out of the market. Despite his adviser's advice to stay the course and the penalty that Tom would have to pay, he went with his gut and got his money out of the market and went on his merry way, which didn't prove to be as merry as he thought it was going to be. With the significant loss of his investments, his finances were not going to allow him to stay retired. He had to go back to work. 

My heart sank as he told me his story. Nobody likes to hear about someone struggling and realizing that their life's work won't be enough to fulfill on their hopes and dreams. 

Honestly,  I do not know the details of Tom's finances. I don't know how he had invested his money nor have I ever been privy to the meetings he had with his adviser when the money was first invested or withdrawn from his investment. The one thing I am taking notice of is that Tom's behavior isn't necessarily consistent with the rules for investing, buy low/sell high. So my mind and the questions I asked Tom went back to when he was first deciding how or where to invest his money. I was wondering if he was prepared to live with a downturn in the market or if he know how volatile his investments were. Were his expectations properly aligned with what he invested in?

So I asked him when he first started, did he get asked if he could come up with a mathematical measurement for how diversified his portfolio was? He said, "No, I was never asked questions like that." With that I surmised that Tom, like a lot of investors, made a decision without being able to fully answer and decide on one of the most fundamental questions anyone could be asked about investing and their financial security. Now he is paying the price and quite frankly is still in the dark as to why things have gone so wrong. 

Diversification is the cornerstone upon which all successful investing rests on and Tom was never given the opportunity answer this question. He was/is in the dark and not fully able to make the proper decision for him. I will lay odds he never got to fully answer questions about risk or cost either. 


To right this wrong and for investors not to find themselves in the same boat, more attention has to be given to the questions that need to be asked. The right questions are going to show investors what they aren't seeing and whether or not they are making decisions based on facts or dangerous assumptions.   

How does the stock market really work? Plus,Where do returns truly come from? These would be a just a couple additional questions that need to be answered as well.  The results Tom and his wife have to live with now most likely are not a coincidence. Nor would they be for any investor who wasn't given the opportunity to be asked the necessary questions and make the decisions that are most appropriate to their situation. 

Brendan Magee is the founder and president of Inevitable Wealth Coaching. With questions or comments e-mail brendan@coachgee.com or call 610-446-4322.