In 401(k) plans, many Americans’ only retirement vehicle, people have to be their own financial planners. Yet because their employers don’t provide enough advice — or the right kind of advice — most people are ill-equipped to manage their 401(k) accounts effectively.
Many fail to contribute enough money to their accounts or take full advantage of employer matching money, when available. They also fail to choose a combination of investments that adequately manages portfolio risk, when this is even possible — many plans don’t offer enough options.
Workers’ investing errors typically include putting too much of their money into money-market funds, which pay too little interest to grow enough assets for retirement; chasing past performance by choosing last year’s stellar mutual funds; and dividing assets equally among various options, a move that lacks strategy and usually doesn’t assure diversification.
Aware of these errors, many employers in recent years have sought to solve the problem by opening their plan doors wide to target-date funds -- mixed-asset investments that tout a “glide path” to investors’ target retirement date by adjusting holdings as they age. The problem with this is that, like the money-market funds now holding a lot of 401(k) money by investors’ choice and by default, target-date funds tend to be heavily invested in bonds, especially in the final years before retirement. So these funds don’t tend to deliver the kind of returns that many people need to retire.
A more fundamental problem is that target-date funds can’t be individually configured. Instead, they’re a one-size-fits-all solution for investors with varying goals, needs and risk tolerances. And uninformed employees sometimes make the mistake of choosing more than one target-date fund.
Thus, workers seeking to build the best possible retirement nest egg are back to square one. They lack the knowledge and expertise to construct and manage a 401(k) account that works for them individually because they don’t get good advice. And all too often, employers fail to provide them with enough help, especially at small companies, which don’t have financial professionals in-house to handle this. The root cause of this and other common shortcomings of plan offerings is often a lack of investing knowledge among plan administrators. So workers and employers are basically in the same boat: They both need expert advice.
New federal rules are ratcheting up pressure on employers to assure better plans, with more objective advice, for reasonable fees relative to the overall market for these services. As the new rules force employers to take a hard look at what they’re paying for their plans and what they’re getting in return, many will find that their employees have long been receiving precious little, if any, plan education or advice, despite high fees in many cases.
Though the new federal rules don’t tell employers what type of advisors to hire, they require employers to determine just what type of advisor they’re using. They must find out whether their advisor is a fiduciary – a legal/regulatory term for advisors who are obligated to always put their clients’ interests ahead of their own, avoiding even the appearance of a conflict of interest. In a 401(k) plan, this means advising employees in their best interests on investment choices from plan offerings. As 401(k) plan sponsors, employers themselves have fiduciary responsibilities.