Unloc(k) The Mystery Of Your 401(k)

401k Lock-01Last 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.

Retirement Doesn’t Have To Be A ‘Gamble’

Retirement Gamble-01If you missed the well-documented, artfully produced PBS Frontline program, The Retirement Gamble,” here’s the nutshell version: You’re screwed and it’s the financial industry’s fault.  This is a piece that is absolutely worth your time to watch if you haven’t yet, but I will warn you that it takes on a bit more of a sensationalistic tone than I’d hoped for from PBS (maybe because the chief correspondent is also one of the protagonists in the story?).

Yes, it’s true that the financial industry deserves the vast majority of the criticism it receives, but I’m pretty sure that if you watch the video in reverse, you hear the words, “J.P. Morgan Chase is Beelzebub.”  Outright demonization is a stretch, even if only a tiny one.  And Jack Bogle, the father of passive investing, may be the closest thing to a saint in the financial industry, but he’s so deified in this program that by the end I thought I was watching a Vanguard commercial.  And most importantly, if you’re going to take an hour to scare the crap out of people—telling them what’s broken and what doesn’t work—I’d like to see a bit more on what works and how we can mend what’s broken.  And yes, PBS, that’s an implicit challenge to follow-up “The Retirement Gamble” (TRG) with a part two: “Retirement Doesn’t Have To Be A Gamble.”  But just in case they’re not already filming and don’t read this post, let me attempt to paint a slightly more balanced, if not hopeful, scenario:

YOU still play the primary role in the success of your retirement planning.  You still choose how to spend your income and how much to save.  I can’t have been the only one to notice that one of the aggrieved “nobodies” featured in TRG is shown working on an Apple laptop at her kitchen table equipped with a flat-screen TV, sitting in front of stainless appliances.  I’m not judging her and I’m not sermonizing you, but most of us have limitations placed on our income that require us to make decisions to endure some form of sacrifice today in order to provide for tomorrow.  While compounding gains may be the engine propelling us toward a comfortable retirement, it’s not going anywhere without the fuel—our contributions.

YOURS is not as hopeless a situation as TRG makes you feel.  Crystal Mendez is one of the regular Janes featured in the program.  She’s 32 years old and making $70,000 per year, decent money for a teacher, and she’s saved $115,000 already for retirement.  According to a recent Fidelity study that judges our retirement readiness based on multiples of current earnings at different phases of life, Crystal is well ahead of the curve.  The study suggests she should have approximately 70% of her current salary saved—and she’s already at 164%.  (Nice job, Crystal!)  Furthermore, if she saves 10% per year until she’s 67 years old (when she’ll be eligible for full Social Security benefits), she’d then have $2,442,544—17 times her salary if we estimate she earns a 7% annual average rate of return and her salary increases only 2% each year.  According to Fidelity, she’d only need eight times her salary for a comfortable retirement at the age of 67.

Crystal's Path

YOU don’t really want the good ol’ days anyway.  We have a habit of painting the days of yore as an idyllic time, when everyone joyfully punched a time clock for the same benevolent company for 40 years straight; the same company that then subsidized a blissful 20 year retirement spent golfing and sipping lemonade on a wrap-around porch attached to a Cape Cod house unencumbered by debt.  But guess what, even if that sweetheart deal existed then, and more importantly today, we wouldn’t want it!  According to CNNMoney, “…by the time they reached their forties, the boomers worked about 11 jobs—equivalent to a job change roughly every two years.”  Generations X and younger hop jobs slightly more.  And is it possible that the employers of former generations weren’t solely offering pensions out of the kindness of their hearts, but also because they wanted to make it very difficult for employees to consider leaving their job—and their pension?  It is true that the once fabled “three-legged stool” of retirement—pension, Social Security and personal savings—is now down to a pair of stilts for most baby boomers and likely no more than a pogo stick for Gen X and younger; but a minority of us would trade a lifetime of occupational freedom for the continuation of a portion of our paycheck in retirement.

Yes, the odds are stacked against us.  And no, the financial industry does not exist for the benefit of its customers.  Yes, that’s a shame.  And no, despite a movement of well-intended zealots and justified outrage in the media, we’re not likely to see the Masters of the Universe unseated in less than a generation (although that won’t keep us from trying).  BUT, your chances for a comfortable retirement are still better than a roll of the dice, as seemingly purported in “The Retirement Gamble.”

Over the course of the coming weeks, I’ll be bringing you a collective of wisdom from numerous sources on how you can demystify decisions regarding not only your retirement, but specifically your 401(k) or other retirement plan, mutual fund selections and a couple of the most complex personal insurance products.  That way, regardless of whether or not the fallen angels of the financial industry clean up their act, you’ll be able to make informed decisions.