bluecollardollar: on the 401(k)

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on the 401(k)

The 401(k) has been called: a retirement plan, the answer to the pension, the worst thing for most people, a self-directed investment opportunity that few of us fully utilize, the reason we won't retire when we should, all of the above.

First, let's take the obvious choice out first: your employer doesn't care one whit about your future as long as it doesn't impact the business. They will offer financial education and pat themselves on their collective fiduciary backs as they do. Educating the workforce is in fact something they are required to do.

But these business owners understand two things. The first is making the 401(k) robust enough that they can not only fully participate in it but to be able to do so without raising the ire of the workforce or the federal government. And the second is doing everything they can to get you to engage in a plan that may be simply lackluster in execution and lacking in viable options that reflect the workforce or their retirement needs.

Here's a list of what you want compared to what they want.

  • Participation
    Nothing says "we're doing everything we can" like having as many people in the plan as possible. Yes there are other considerations in making these plans better in the eyes of the folks who monitor these plans. But a near total involvement signals the plan is worth getting in and staying in.

    This is where the auto-enrollment effort comes into play. Auto-enrollment for those of you who may not know what this is offers the employee the opportunity to opt-out of the company's 401(k) plan when they are hired. Understanding human behavior, particularly in those initial days on a new job is key to the success of this effort. Few people say no to the opportunity to invest in the 401(k) when they are offered it.

    You want in and they want you in. But they don't make the welcome mat as welcome as they should. You may not be vested for years. The match they promised may not be yours for five years. And you may have given up on other key benefits in favor of the illusion of a robust 401(k).

  • Investments
    The 401(k) can't be all things to all participants and because of that, of late it seems it is not much for most of us. There are actually two problems at work here: lower fees and investment options that reflect the workforce. Your employer knows that lower fees in the investments they offer appear to kill two birds with one stone. And even as they add funds such as index funds and exchange traded funds, shuffle unsuspecting new-hires into target date funds and cull the higher priced (actively managed) mutual fund offerings, they are not doing everything they can to keep the administrative cost down.

    Many plan administrators have suggested that education isn't cheap, compliance isn't free and keeping the plan out of court isn't as easy as it sounds. The employee wants a pension and the employer wants to give you something that looks like one without the costs. You would not have heard anything like this just five years ago. Folks in 401(k)s were downright pleased with the stratospheric heights many of these plans were achieving.

    Now you hear talk of annuities (a good idea for a few and if they can pull it off, a much better option for women) as a way to ensure that older workers can lock up their money into a steady stream of income for life. With one exception, this is a good idea. The exception: it is an annuity.

    Annuities are not for everyone and with good reason. This part-insurance, part-investment option really does little for the owner of the annuity besides projecting and often guaranteeing income. It does come with a cost and most folks figure this out after they own it.

  • Match this
    Of course your employer wants you to have a match. The larger the opportunity for you, the greater the opportunity for the highest paid workers. These are actually the ones who take the full amount allowed, which for 2012 is up to $17,000 with a catch-up option for those older than 50 of $22,500. This isn't because you want to invest more; this is because they want to invest more. Evidence: according to the Census Bureau, the median household income in the US is $50,221 and most of us barely contribute 5% of that.

    Earlier I mentioned vesting. New workers often don't stay in a job long enough to get that robust (or paltry) company match. The vesting period, usually five years, gives you the illusion that the one is yours. But if you leave before vesting, the match stays.

  • The 401(k) has been called: a retirement plan (it is but only if you fully maximize it, diversify and grasp the concept of a budget while you are working), the answer to the pension (pensions were fine when we kept our debt in line, owned our homes at retirement and successfully launched our children into the world), the worst thing for most people (most folks don't understand that even a bad 401(k) is better than no 401(k)), a self-directed investment opportunity that few of us fully utilize (auto-enrollment is a good idea as is auto-escalation but you will need to contribute more than the minimum to make the concept work), the reason we won't retire when we should (we fail to understand risk and why is plays a role in the process), all of the above.

    bluecollardollar: from the blog

    Retirement: Comparing Apples to Oranges

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