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What Are Your Thoughts On These Proposed 401(k) Changes?
By JLP | February 2, 2010
Interesting article on Obama’s plans for retirement savings programs.
I want to focus on the proposed changes for 401(k) plans (from the article).
The proposed 401(k) Fair Disclosure and Pension Security Act, for example, would:
• Require 401k plans to disclose fees on workers’ quarterly statements as a dollar figure taken from participants’ accounts.
• Require service providers and plan administrators to disclose administrative, investment management and transaction, along with other fees.
• Help workers understand their investment options by providing information on risk, return and investment objectives.
• Require plan administrators to offer at least one low-cost index fund in order to receive protection against liability for participants’ investment losses.
• Require service providers to disclose financial relationships so companies that sponsor 401k plans can make sure there are no conflicts of interest.
• Ensure that investment advice is based on workers’ needs, not the financial interest of those providing advice.
• Provide adjustments to pension funding rules to ensure plans can weather economic crises without providers being forced to cut jobs or freeze plans.
A paragraph or two above the information I posted, there is mention of wanting to add annuities to 401(k) plans. I think this is a BIG mistake—especially if these annuities mean more income to the provider of the plan. Why do I say this? Well, if you look at one of the bullet points, it mentions helping workers understand risk, return, and investment objectives. It’s not hard to sway an uneducated person from one product to another just by talking about risk. For instance, the “advisor” could simply ask the question, “How much of this money can you afford to lose?” Of course the natural response is an emphatic, “NONE!” The next thing you know, the advisor is talking about “guarantees.”
I think the public would be better served if we focused on costs and education (provided by a third party with no ties to any fund families).
What are your thoughts on these proposals?
Topics: 401(k), Retirement Planning | 12 Comments »
February 2nd, 2010 at 11:20 am
Most of these proposals make sense to me and will probably help many participants in 401k plans. Some of them like “Ensure that investment advice is based on workers’ needs” are a little vague, but knowing how much these plans cost you would be a very good start, since there are so many hidden fees in 401k plans.
I agree with you that annuities should not be part of a 401k plan. These things have even more hidden fees than most other investment vehicles.
February 2nd, 2010 at 11:26 am
JLP,
1) I want to know who is going to be responsible for all this education? Is the HR person or company going to be sued, when an ex-employee complains that they weren’t adequately taught? What if it is a Third Party Administrator? What do you think that is going to do expenses?
I just think there are a lot of unforeseen consequences going on here.
2) I don’t think all annuities are bad. Who is to say that a fixed income, non-correlated asset is a bad option…it is just that an option.
February 2nd, 2010 at 11:42 am
Missing one major thing: opt-OUT of 401K instead of opt-IN.
Choice is still there, but let’s face it – people are lazy. 401K participation more than doubles for companies who have moved to an opt-out system.
February 2nd, 2010 at 1:26 pm
“Require plan administrators to offer at least one low-cost index fund in order to receive protection against liability for participants’ investment losses.”
Since when are losses anything but your own?
February 2nd, 2010 at 2:15 pm
I don’t see any big problems with the proposals in the bullet points. It looks like requiring disclosure of costs and risks of the various funds in a 401k.
I can see that certain financial sales persons or fund companies would rather you didn’t know what a big slice of your returns are going to them. Or that a particular fund company was chosen as the 401k provider more for the kickback they gave to the benefits manager or CEO than the low cost and quality of the funds for the employees.
As for annuities, the TSP (401k program for Fed employees) offers an annuity as one way to withdraw funds. It doesn’t interest me, but for a single person with no children, it might be the best way to go. Maybe someone ccould sway an uneducated person with scare tactics into buying an annuity. But that same person is the one that will squeal the loudest when their S&P 500 index fund drops in value. Some people value security and stability more than returns. I say, if that is what they want, then that is what they should get.
February 2nd, 2010 at 7:25 pm
I always wonder with annuities – will the company (or governmental unit, for that matter) making the payout still be in business in thirty years?
February 2nd, 2010 at 11:21 pm
I agree with you that annuities are a bad idea for a plethora of reasons. Namely, what makes anyone think that the annuity providers will be in business if we suffer through another melt down? The biggest annuity players were the same companies that were staring into the abyss one year ago. 401k’s are flawed in that your investment options are limited. Why not treat 401k’s like an IRA and let workers invest in what ever they want?
February 4th, 2010 at 12:33 pm
While all of the ideas have a positive face value, I am with Ctreit; Who is going to provide all of this education?
When it comes to investing and retirement, the worker has to take responsibility for their money and future. I have found the same operator who can tell me where to find a $5 coupon off an oil change at a certain website is the same operator who doesn’t know if they are contributing to their 401K.
This is another litany of rules which are nearly impossible to enforce and remove responsibility from the investor.
Companies should implement opt out systems and ensure they offer a low cost index fund which covers the major investment catagories. They should also offer a yearly voluntary information session. After that, employees have to take responsibility for their own large sums of money.
February 5th, 2010 at 12:53 am
I’ll admit there are things about my company’s 401k plan that I’m not happy about. Here’s a refreshing, why don’t we scrap 401ks and allow American’s to deduct up to 16,000 (or whatever the current limit is) from the fed income tax and let the market work out the details. My wife buys the exact same mutual fund through her 401k as we do on the open market for our Roth and her fees via 401k are more than double.
February 6th, 2010 at 7:48 pm
The difficulty I have with all this focus on 401K stuff is that those barking the loudest seem to forget investing is inherently a risk. In the backdrop of the current economic downturn, everyone seems to want a guaranteed, risk free investment that we do not have to know anything about.
I do agree, though, that fees and any relationships or affiliations should be pointed out.
I think that the govt has a great deal to do with how people perceive the 401K since it was billed as this great, probably secure way of securing your retirement. People believed what the govt said about 401Ks and committed money without thinking about the investment, costs, etc. I think people now are more aware, but the fact people are crying about being duped or losing money in their 401K’s to me indicates they were being stupid to think that the 401K was a guaranteed way to secure retirement.
February 8th, 2010 at 5:20 pm
Annuities are quite common in Pension schemes in Ireland and the UK. In Ireland it was till recently (about 10 years or so ago) you took some as a tax free lump sum and the rest was paid out to you in an annuity.
The opt out issue mentioned by another comentor is also quite useful, this has got many people in New Zealand into a pension fund for the first time.
March 3rd, 2010 at 11:45 pm
the change i would like to se the ability to withdraw money after the age of 59 1/2 even with the restrictive 401 K plan that only alows withdral for buying a house, fixing or prevent forcluser, medical, educational, or death
as i am over 63 and still working i can not withdral money to get ready for retirement but if i am still working after 70 1/2 i have to take money out I WANT my money now