Thursday, August 23, 2007

Dislike Your 401K? Join the Club

My first unscientific blog poll closed last week, and here are the results. The simple question I asked my readers was: "Are you happy with your company's 401K?" Of the (measly) 21 votes I received 57% said "yes", while 43% answered "no".

The number of people happy with their 401K plans surprised me. I was expecting a distinct majority of people that would vote against their employers' plans, especially among more engaged investors, a group which is probably over represented in the readership of this blog. Nevertheless, the poll results clearly show that a large minority of workers are unhappy with their employers' plans. Why is that?

As a member of my company's 401K committee, let me take a few educated guesses:

1. Limited Options - many people are unhappy with the type or selection of investment options made available to them in their employer's 401K plan. Whenever the topic of our retirement plan comes up in a discussion with my colleagues, the number one request I get is: "can you add XYZ fund?"

The truth is that employers are unable to accommodate all employee requests in this area. There is a substantial management cost associated with administering the plans, and these costs increase as the number of investment options in the plan goes up. If we were to add every investment option people are asking for, there would be hundreds of different funds in our plan.

In addition, we must also consider those employees that are less comfortable with investing. We find that when such employees are faced with too many choices they either make bad financial decisions, or decide to avoid the issue altogether by not contributing to the plan.

So how do we solve the problem? We offer people a self directed 401K option. You want more options, you got them.

2. Lack of Transparency - OK. Maybe this is just my own pet peeve, but it truly annoys me that even as a member of my company's 401K committee I cannot get a full grasp on the costs our plan participants are incurring. Sadly, the financial institutions that sell and administer these plans go out of their way to make things difficult to understand, and complex to follow. They figure that if you knew the true costs you are paying you may be less inclined to trust your money to them.

So how do we solve the problem? My company is trying to improve the situation by taking the long road towards switching 401K providers - so far, it has taken us eight months (and counting...)

3. Matching - many companies offer only token matching of employee contributions. I have previously worked for a company that did not offer any matching whatsoever. I would not repeat that mistake again today. The nice thing about the match (in addition to the fact that it is free money) is that it goes on top of the employee's $15,500 annual contribution cap. By the way, as far as I am concerned, this is not fair towards those employees whose companies do not offer a match. Why should the government care who is the entity putting the money into the account?

I have previously stated that as far as I am concerned, the 401K system is flawed and should be replaced. I stand by that statement.

Are you unhappy with your company's 401K plan? If so, why?


plonkee said...

You should get a system like ours in the UK where you may contribute as much as you like but there is a lifetime (inflation-adjusted) cap on the amount of money you may hold in retirement funds.

Shadox said...

God, no! That sounds like a horrible system. If there is anything worse than an inflexible government telling you how much money you can put in each account and from what source, it is a government that tells you how much money you are permitted to end up with... why this is like incentivizing people to make sub-optimal investments to make sure that they do not exceed some arbitrary account value cap...

The solution I am proposing is much simpler: have a cap on contributions, but don't limit the source, and don't tie that investment account to an employer. Why should employees be tied down to a horrible 401K plan just because the work for a company that does not have its act together? Let them take the same amount of money and invest it in an IRA (individual retirement account) of their choosing. That seems like plain common sense to me, which is yet another reason it will never clear Washington...

Anonymous said...

I agree totally with shadox. My cynical side believes that all the 401k restrictions such as managed by the employer, penalizing "highly compensated employees" like my wife, crummy investment choices are because really in the end, they don't want us amassing too much wealth! I guess the UK is more honest about that.

Shadox said...

I don't know whether it is that they are trying to "keep us down" as you suggest or mere bureaucracy.

My dad always says "Given the choice between betting on malice and betting on stupidity, always put your money on stupidity". As far as Congress is concerned, let's just say that collective intelligence is not something that they are famous for.