Dec. 11, 2012 -- Millions of Americans are headed for an extremely disappointing retirement because they aren't putting enough money away in their 401(k) plans and aren't managing these plans effectively. The answer to this problem lies with you and your employer.
Though many 401(k) investors could put far more money into their plans out of their paychecks each month, reducing their tax bills in the process, many others simply don't have enough left over after their monthly expenses to adequately fund their plans. Yet, this is all the more reason to learn to manage your plan effectively to get the most out of it come retirement.
Most people in these plans have no idea how to manage them. That's why your employer should help you. After all, there's no point in providing employees with this benefit if you don't help them get the most out of it. It's like giving your son or daughter a car and never ensuring that they know how to drive safely. Most 401(k) accounts crash before reaching their destination.
Employee benefits usually stem from market demand and employee requests — especially in a labor market that will be tightening increasingly as unemployment continues to fall. And education on how to manage your 401(k) plan is a critical component of this benefit. So if, like millions of others, you don't understand your investments in the plan and how they should be managed, you should go to your employer for help.
Some large employers have effective programs set up to provide this assistance. But many companies, including most small and midsize firms, do not. So, for you to get the help you need, your employer may have to make some changes.
Your reaction to this may be that this won't happen because it will cost your company money. The welcome news is that it won't because, in most cases, employees, not employers, pay plan expenses — out of their accounts. These fees may be so high, so inflated, that your employer might be able to add an education plan or improve your existing education program at no additional cost by changing plan providers.
New federal regulations are forcing employers to take a hard look at the fees for their plans to determine whether they're reasonable and to make changes necessary to assure that they are.
This will ultimately cause a shift in which many companies will get new plan providers who charge lower fees. So there would be money left over for employee education, preferably in the form of objective advice from an independent advisor.
Education and advice on your plan should help you make investment choices and revise these choices as time passes. Key elements of an effective 401(k) plan education program should include:
• Basic instruction on different asset classes and why diversification among these classes is critical to avoid big portfolio losses when one asset class tanks. This means understanding the basics of asset allocation — deciding how much of your total portfolio to invest in stocks versus bonds versus other types of assets.
• The impact of fees. Plan providers are now required to disclose their fees and those of companies providing investments for the plan in quarterly account statements they send to employees, but these disclosures are still murky. Your employer is required to understand these fees, so HR people, or perhaps an advisor working for them, should be able to explain them. Fees are one of the most critical factors affecting investment returns. Remember: How much you're paying for your plan determines its value. If these fees are high relative to the market, your employer should negotiate them down or, failing that, change providers.
• The impact of inflation. By understanding the impact of inflation on your portfolio, you can make better investment choices to limit the damage. If you're buying 30-year bonds as inflation is rising, or is about to rise, you could be losing money on this investment for a long time.
• Why your basic investment goals should evolve as you age. The investment objectives and needs of individuals of the same age vary widely. But the basic investing principles that people need to master also vary with age because people of different ages have different time horizons for retirement. This is why employers who do the right thing by setting up plan education classes should make sure these classes are separated according to age. There should be separate classes for people in their 20s, 40s and 60s.
• Information that helps you understand the concept of risk tolerance, how it applies to you personally and how it affects your investment choices. If you're taking too much risk, you can't sleep at night. Or, if you're taking more risk than you're aware of, perhaps you're sleeping too soundly. If you don't have a low risk tolerance, you shouldn't have most of your money in bonds (which pose far lower risk than stocks) unless you're a couple years from retiring or already retired.
These and other important elements of 401(k) plan education should be part of a written company policy. When investment managers write down their guidelines for clients, they call this an investment policy statement (IPS). Employers should do the same regarding principles of employee education by creating an education policy statement (EPS).
By seeking more plan education and advice on your particular 401(k) account, you could help your employer develop a more effective benefits program at potentially no additional cost. This could make the company more competitive by enabling it to better attract, retain and motivate skilled employees. The key is to remember that you and your employer are in this together. There is nothing adversarial going on here because employees and management have the same interests. After all, the top executives of your company also participate in the plan.
Moreover, improving your plan's effectiveness by making sure that employees understand it can only improve workplace morale. People are happier if they know that they have a better shot at a dignified retirement.
This work is the opinion of the columnist and in no way reflects the opinion of ABC News.
Anthony Kippins is president of Retirement Plan Advisors, Ltd. a Registered Investment Advisory firm that addresses the needs of retirement plans and the employees who invest in them. An Accredited Investment Fiduciary Analyst (AIFA®) with more than 30 years of experience domestically and abroad, Kippins specializes in providing fiduciary advice to retirement plans on governance, investments and educational services. He also advises individual clients on retirement planning and investment management after retirement. Kippins serves as managing director of Institutional Fiduciary Assurance LLC, an organization that provides fiduciary advice to trustees of endowments, foundations, non-profit organizations and charitable trusts. He can be reached at firstname.lastname@example.org.