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.