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Holiday Wish List: 7 Things We Want from Our 401ks
Many people in our grandparents’ generation continued to receive a paycheck (in the form of a pension) from employers during retirement. They could move to Florida and play golf, or whatever suited their fancy.
Those days are mostly over. We have to pay our own way in retirement. Ok, we get it. So given our situation, wouldn’t it be nice if our employers and the companies that provide our 401k plans did their best to make this formidable task a tad easier?
We’ve compiled a holiday wish list to let the 401k elves – and the employers that provide 401ks (and other similar retirement plans) — know what we’d like to see them work on for the New Year:
1. We want full disclosure of ALL fees – and before slow-as-molasses Congress requires it.
It’s pretty clear what the investments inside our 401ks cost. These expenses are expressed in the form an expense ratio (say, for instance, 0.10% if you’ve got a good index fund, or 1.5% if you don’t). That’s the amount the fund managers charge for managing the investments; those costs are skimmed off the top of our accounts each year.
It also costs additional money to administer a 401k plan, since the pencil-pushers there have to buy more pencils and pay the light bill. But those fees (among several other hidden expenses) are sucked out of our accounts without anyone telling us how much they took. How are we supposed to make informed decisions if we don’t know what a particular investment option is costing us, in its entirety?
Could you imagine letting the cable company simply charge it wants and then deduct that money from your checking account each month without any itemization? And yet we’re completely fine with allowing this to occur with our retirement money?
Congress has yet to pass any of the legislation addressing this issue, though there have been quite a few bills introduced. Our employers need to make more noise, jump up and down, whatever’s necessary — and demand disclosure of this information. Then, they need to share it with us. And 401k administrators should offer it up before somebody makes them do it.
2. Show us the impact of those fees, in easy-to-understand terms.
I get paid to write about personal finance, so I know the impact. It’s big. Most people, however, tend to focus solely on a fund’s performance record instead of factors they can actually control (or at least negotiate), like fees. Telling us that one fund is going to cost $15 for every thousand dollars we invest while another will cost a mere $1.50 would simplify matters.
3. Give us index funds across all asset classes.
Come on, this one’s a no-brainer. Pricier actively-managed funds almost never outperform index funds over the long haul. Yet index funds are playing a smaller part in 401k plans, our cousins at The Wall Street Journal reported recently (this important story isn’t available anymore on wsj.com, so sorry about the lack of linkage). All employers should offer index funds up and down their investment menus. Period.
4. Give us a good target-date retirement fund option, too.
Some folks don’t have the time and patience to deal with picking funds, never mind rebalancing their portfolios each year. That’s why all plans need one set-it-and-forget-it option: target-date retirement funds, also known as lifecycle funds. With a target-date fund, all investors need to do is pick one fund: the one with a date closest to the year they expect to retire. The fund, which invests in a series of other funds, becomes gradually more conservative as you reach retirement.
Note to employers picking these funds: give us a target-date fund that invests in a few solid index funds, like Vanguard (other fund companies appear to be using their target-date funds as an opportunity to collect money and spread it across their entire family of funds, not just their top-rated funds).
5. Let employees sign up for a 401k on the day they start working.
This is our retirement we’re talking about — don’t make us wait. The sooner we can start socking money away, the sooner we’ll reach our goals. It’s also a good way to attract employees, since there are still companies out there that make you wait a year. We’re going to war on this one once FiLife launches for real. Stay tuned for that — we’re gonna name names and it’s gonna be fun.
6. Do away with the vesting schedule.
Vesting works like this: Your employer matches some of your 401k contributions but you have to wait a few years before the full match truly belongs to you. So if you leave after a year, you might only get to keep 40% of the match. Some employers make you wait as long as three years, after which you’re fully vested, or they can gradually vest contributions over as many as six years. Most companies gradually vest over five years.
Given that many people don’t stay at one employer for five years, this seems unduly harsh. And since many employers aren’t funding old-fashioned pension plans anymore, they ought to be able to give us the full match on day one.
7. Give us low-cost advice from a planner that will serve as fiduciary.
Many companies have been too scared to provide 401k participants with investment and asset-allocation advice because they’re afraid of lawsuits. However, if they provide the services of independent financial planners who serve as fiduciaries (someone that’s held accountable for putting the investors’ interests first), doesn’t that solve the problem?
The planners should charge a flat fee for their advice or charge on an hourly basis – and they should have no ties to the investment providers offering the 401k plan. And how about if employers pick up the bill, or at least pay some of it?
Illustration: Fortunewatch.com
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Is that Bob Hope? 
Thank you for the great pointers! Very interesting. I am sending it to my coworkers!
The 401K is so poorly designed in the tax law that it would be amazing if even a bare majority of investors are going to be ready for retirement. The 401K should have been set up so that employees, through payroll deduction, could invest into an account that the employee controls in a vehicle outside of the workplace(Fidelity, Vanguard etc), not an account that is essentially under the supervision of the employer/401K administrator. This necessitates rolling over these funds every time an employee decides to change jobs or is forced to find a job involuntarily. This can be an administrative nightmare and a financially devastating system for people who are not lucky enough to work for a single employer throughout their work life and thus face rolling over their 401K again and again. Those small 401k accounts, less than $5,000 balances, that have to be liquidated can cripple a retirement plan over time if they are not handled properly.
