Last week, in my review of the Frontline program, “The Retirement Gamble,” I promised to follow-up with a short blog series giving concise direction on how to demystify some of the more confounding elements of personal finance, beginning with the foremost culprit of “The Gamble” (aside from J.P. Morgan Chase, of course)—the 401(k):
Recent action by the Labor Department requires more transparency in the reporting of fees in 401(k)s. “While the intent and spirit of the legislation was good, I’ve found the implementation was pretty ineffective,” says Josh Itzoe, author of Fixing the 401(k). “It’s possible to be compliant from a regulatory standpoint and still make the information totally confusing and unclear. I think that is where we are.” While you’re overcoming your shock that the government has failed to simplify the regulation of [anything] to a satisfactory degree, consider taking these three steps to unlock the mystery of your 401(k) or other employer sponsored retirement savings plan:
1. Educate yourself on the structure of your 401(k) and the associated fees. Yes, I know this likely falls just below rolling in poison ivy on the totem pole of ways that most of us would like to spend our time, but we sacrifice the privilege of voicing our displeasure with the state of our primary retirement savings vehicle when we don’t even understand its basic structure. Start with what you already likely know: Do you get a company match, and if so, how much do you have to contribute to reap its full benefit? Then, move on to the fine print describing your company’s requirement to actually follow-through on its match (they can likely skip matching in certain circumstances) and when it is paid. Review your investment options and their short-, mid- and long-term performance.
If you’re not satisfied with the amount of information provided, plug your mutual fund options into the “Quote” box in the top-center of Morningstar.com to see what they think of the fund. Theirs is not the last word, but their findings can add to the context of your decision-making. And while I believe that it can be worth it to pay truly gifted fund managers for outstanding work, 401(k) mutual fund options are notoriously mediocre. This means that finding the lowest cost funds in your composition of a diversified portfolio is of paramount importance. Emily Brandon’s article, “What You Need to Know About 401(k) Fee Reports,” offers a process designed to enlighten us on making the most of the new fee disclosures, which unfortunately are cryptic enough to render them nearly useless without guidance. If you end this journey of discovery just as (if not more) confused as when you began, get some help; preferably from someone who won’t turn your confusion into a sales opportunity.
2. Speak up! It’s a tiny minority of us who can go into the office the next day and restructure our employer-sponsored retirement plan, but wheels don’t squeak unless you turn them and we all know which wheels typically receive oil and in what order. “You may not have the power to change the plan, but you can and should provide feedback to your employer about the plan,” says Roger Bair, director of retirement plan services at the Financial Consulate, Inc. The chances are also good that your employer would benefit just as much from improving your 401(k) as you would, but it won’t be easy to affect change for numerous reasons. (Among those reasons, your boss might lose a golf buddy if the plan is replaced!) I wouldn’t necessarily recommend going quite as far as Maya in Zero Dark Thirty, writing the aggregate number of days you’ve been waiting for action on your boss’s office wall every morning, but pleasant persistence can go a long way.
3. Control what you can. My biggest concern with Frontline’s “The Retirement Gamble,” as well as other notable critiques of the financial industry’s retirement plan mismanagement, is the less-than-subtle implication that the financial industry is so bad and 401(k)s are so complex and the effort of saving enough is so monumental that the majority of Regular Joes can do little more than raise the white flag and give up on retirement savings. I agree with almost all of the criticism, but I’m unwilling to concede that the battle is lost. Bair guides that “you should use the best investments and make the best asset allocation you can given the tools that you have.” Itzoe encourages that the primary determinants of successful nest egg building—the amount saved, being globally diversified and choosing the best available funds with the lowest possible costs—still fall within our control.
In the 401(k), we see the mess created when corporate self-interest, profit motive in the financial industry and regulatory bungling collide, but for most of us, the 401(k) is still the best gig going for increasing the probability of a comfortable retirement. So get to know your plan. Better.