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Fixing the 401(k) Crisis Summarizing the first 3 installments in this series: America is facing the disastrous prospect of millions of retirees running out of money in the coming decades. In large part this problem has arisen from 401(k) plans replacing traditional pension plans.
This is because employers generally lack the expertise to understand costs and investment options that best benefit their employees. In turn, employees generally understand little about how to build a prudent retirement portfolio with the options presented.
So how does this get fixed?
1) Require any broker or advisor (or financial company installing the plan if no advisor exists) to be a fiduciary to the retirement plan. This would mean anyone being paid has a legal obligation to uphold the best interests of the participants.
If this sounds simple, right, logical, or obvious, it's because it is all of the above. And it would be the easiest resolution if the financial industry were not fighting tooth and nail to absolve itself of the responsibility and liability that comes from making such a commitment.
The DOL recently tried to expand the definition of fiduciary for this purpose only to be halted by a heavily lobbied Congress.
This is unfortunate as plan participants lost professional fiduciary management of their retirement funds once 401(k)s took over. Unlike 401(k) plans, pensions were directed by investment professionals in a manner that would likely yield a life-long annuity to maintain retirees' standard of living.
This likelihood was dependent on the portfolio manager's adherence to prudent investing principles and a deep ongoing understanding of structuring investments and retirement incomes. The 401(k) plan is nothing short of a Do-It-Yourself system wherein participants get a few funds to pick from and are expected to build and maintain a strategy that will yield the same outcome.
To say this is an unrealistic expectation is to say a tornado is breezy.
By making brokers and plan advisors a fiduciary to a plan, at least the sponsoring company and its employees would have someone in place who is trained in these matters. More importantly, as a fiduciary those people would be on the hook for the recommendations and advice given.
2) Create a new retirement plan, the 401(f) (the f stands for fiduciary).
If the big brokerage firms are going to be allowed to market and implement their 401(k) without a fiduciary obligation, then create another plan category that requires an independent fiduciary is in place to help monitor the plan and make recommendations to participants.
Once plan sponsors are aware they have an option that enlists a fiduciary my guess is they will migrate to it, even if it isn't a requirement. After all, plans that have a professional fiduciary in place are often lower in cost and generally absolve the company of a great deal of liability it incurs just from offering a plan.
3) Create the IRA(k).
Currently, employees contributing to a 401(k) face restrictions in also contributing to a traditional IRA account. Even if this were not the case there is still the problem that contribution limits for a traditional IRA are far lower than 401(k) accounts.
As it stands now participants have no say in who they get advice from and what investment options they can use in their primary retirement plan. If the 401(k) market is to be left unchanged, at least allow employees to direct pre-tax funds to the service provider of their choice.
IRA(k) advisors should be required to uphold a fiduciary role to account holders. The contribution and other limitations for an IRA(k) should be the same as a 401(k); except the employee decides who she wants as an advisor and has access to many investment options unavailable in most 401(k) plans.
This resolution would create extra work for payroll offices. At the same time, however, it would absolve the employer of liability for employees participating outside the company sponsored plan.
With an IRA(k), the company simply sends the contribution where the employee directs. Of course this idea is so compelling many companies might close down their plans altogether and just let the employee pick where she wants to invest contributions and company match.
The financial industry would probably like this idea even less than being made fiduciaries to 401(k) plans..
4) Immediate Automatic Enrollment
Currently companies have the choice of automatically enrolling new hires after their probationary period, but most companies require that the employee "opt in" to the plan. Employers who match contributions are financially incentivized to do this, as fewer employees wind up participating so the company has to match fewer contributions.
In the days of the pension, when someone was hired a portion of their pay was automatically contributed to the retirement plan the day he started and that was the end of it. Reinstating this as a requirement would perhaps have the greatest beneficial effect on the retirement crisis we are facing.
The reason I have included this be immediate – start on the date of hire – is if the income deferral begins after the employee has become accustomed to his paycheck, it is more likely he will opt out. Some may argue that "forced" retirement contributions are not fair or even unconstitutional.
I would argue the current retirement plan system is not fair as it is set up to fail. And fail it has. Last I checked, I am forced to pay taxes. And last I checked, it is the taxpayer who winds up supporting people who run out of money. At least in a "forced" retirement account you get to keep the money.
In conclusion: the current 401(k) structure could hardly be more antithetical to free market capitalism. Big brokerage firms have so far been successful in maintaining their self-regulated monopoly over the 401(k) market in which everyone but them is responsible for what's in and how to use a plan.
The root of my suggestions lies in expanding the market place either in existing plans or by creating alternatives that mirror what has been successful in the past. However it's accomplished, improving the status quo isn't rocket science.
People and companies who are compensated for working with those saving for retirement are required to uphold the client's best interest. And everyone who wants to retire sometime is compelled to save enough…somewhere… that this is a possible outcome.
I welcome your questions and comments.
Marc Becker, Accredited Investment Fiduciary
Managing Partner, Wiser Financial Coaching, LLC
Wiser Financial Coaching, LLC, is a Registered Investment Advisor Firm
Trivia Time
This week's question: It's still July and we are already on our fourth named storm of the 2013 Atlantic hurricane season. Since there are only 21 designated names per season, how are storms named if more than 21 named tropical storms occur in the Atlantic in a single season?
Do you know? E-mail your answer wendy@wiserfinancial.com and if you are correct, receive a free "Way to Go!", "You Rock!", or other congratulatory phrase. Then brag to all your friends about how smart you are.
The answer will be in next week's newsletter!
Last week's question: At about 2 2/3 football fields long, what is the largest (by length) aircraft every flown?
Answer: The LZ-129 Hindenburg airship.
Congratulations to Jerry S., Brett B., and Dick W. for getting the correct answer! What smart people! |
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