When the Federal government, together with Corporate America, offered the American worker 401(K) and 403(B) tax-deferred savings plans, as an alternative to pension plans, they forgot one thing. The vast majority of employees have no idea how to manage these plans.
Back in my Dad’s day, managing American’s retirement savings was the job of professional pension plan managers. The money was invested conservatively, with a long-term view, regardless of market conditions. Clearly, it was the tortoise approach to investing, but by the time he retired his nest egg had grown considerably.
Today, less than 3% of all workers are enrolled in traditional pensions. The demise of pensions has many causes. At one time, workers spent a life-time working at only one or two companies. Today employees hop-scotch from job to job, since there is little loyalty left on either side of the desk or production line. Pensions under those circumstances make little sense. The practice of under-funding pension liabilities by corporations certainly did not help. The Pension Protection Act in 2006 ended that gimmick and with it signed the death warrant for most pension plans in America.
Instead, employees today are allowed to contribute a certain amount of their pay, tax-deferred, to these government/company-sponsored savings plans. Some companies will match your contribution up to a certain percentage level and most offer workers a menu of investment choices. From there, you are on your own.
Let’s say you have been conscientious in contributing to your company’s tax-deferred savings plan for 25 years and you are getting ready to retire. You call me and arrange a meeting to discuss your options. More often than not, the first thing I discover is that all of your money is invested in one or two bond funds or even worse, a money market fund.
“How long have you been invested in these funds,” I ask.
“Since the beginning,” the prospective client says, sheepishly.
” I didn’t know what to do and I had no idea what any of the funds did, so I just stuck it into whatever came first on the list.”
Don’t laugh. I have encountered this situation in a variety of forms time and time again. It is not your fault. I have invested six years of education and 34 years of financial experience to get where I am. I suspect that you are every bit as good at your job as I am at mine. And you have probably spent a similar amount of time and effort remaining good at what you do. So why are you expected to also be good at investing your money–and in your spare time?
Let’s face it, most workers do not have the time, education or inclination to acquire the knowledge necessary to make good investment choices over many years. What can you do?
You can read columns like this and hope enough sinks in to make the right choices. You can ask people like me, professional money managers, to take a look at your investment and suggest alternatives. I do this for many, many people at no charge. Another alternative to consider that could drastically increase your investment results would be to switch some or all of your money to a self-directed 401(K) or 403(B) plan.
There are two types of these plans. If you are self-employed, you can open a solo or one-participant 401(K) plan. This can be managed by a professional for a fee while you are still contributing to the plan. Normally, the expenses involved in managing the plan are cheaper than the costs and fees involved in a company 401(K), plus you will be receiving professional management advice.
The second type is a little-known investment option that some companies offer in their retirement plans called the self-directed brokerage account. These “Selfies” are part of your investment menu. They allow employees to take advantage of many more investment choices than are normally offered in a 401(K) menu. For individuals who have investment experience, the brokerage option offers a great opportunity to fine-tune an asset allocation strategy. But if you don’t have that knowledge, you can hire an investment advisor to do it for you.
Better yet, you have the flexibility to farm out some of the money to a manager for a fee and keep some with your traditional 401(k) plan, if you so desire. This way you can get the professional financial advice you need now, while you are still contributing, rather than having to wait until you retire. As for fees, most company-sponsored, tax-deferred plans charge a yearly fee without providing advice. If you are going to pay a fee, you might as well pay it to someone who is going to manage it as well.
Not all companies offer this option. You should check with your human resources department and if they don’t offer the option, suggest that maybe they should. Make sure you take the time to select the proper investment manager, one that has a “fiduciary responsibility” to his/her clients, unlike a broker, who simply is required to put you into a “suitable” investment. Make sure you understand the difference. If you don’t, contact me and I’ll explain it.