I could lament the passing of the pension plan for weeks on end. And for just as long, I could criticize the creation of the defined contribution plan or 401(k). While these plans replaced the old, reliable defined benefit plan, a move that shed the responsibility the company once assumed, they increased the danger and the risk that the worker never had. Not to say that pensions didn’t have risk. They did. But the advent of the 401(k), using the premise that you could control your investments was sold as the best way to get you to a comfortable retirement, presented the average worker with something they had not been exposed to previously.
401(k) plans gave the worker the right to choose where to invest, how much to invest and when along with the ability to take their investments with them, this false sense of retirement security created a whole new subset of problems. These plans generally offer you mutual funds to invest your pre-tax dollars. And it is here that the problems begin.
Buying individual mutual funds via an IRA allows you the opportunity to choose from tens of thousands of funds that could suit you needs – if you know what your needs are. 401(k)’s offer a closed arena in which to invest, usually in funds supplied by the plan sponsor. These choices can be limited to the plan sponsors own funds or possibly a selection picked out in conjunction with the company. This creates an unseen conflict of interest as some plan sponsors shirk their fiduciary responsibility in favor of selling what could be poor(er) performing funds with higher than average fees. While this is wrong – on numerous levels – it is hard, almost impossible to get your company to own up to this mistake.
While these plans might have some funds that do perform well, there is little likelihood that all of the available investments will.
Because you have enlisted a separate record keeping system, rather than one you direct with an IRA (which is tax deductible at the end of the year rather than a pre-tax deduction with each paycheck) the chance for errors increase dramatically. As a 401(k) investor, you will need to track not only where your money has gone, but that it has gotten to the place you chose. Among those problems, the errors can come from just about anywhere. Because these plans involve thousands of employees, a dozen investment alternatives, participants’ contributions, sponsor’s matching contributions, changing pension laws, anti-discrimination rules, early retirements, layoffs, mergers, bankruptcies, dissolutions and understaffed and sometimes untrained benefits departments, just about anything could occur.
Portability is sold as one of the main benefits of a 401(k), allowing you to take your money with you. Except, you have to take it from your old employer and roll it into an IRA. Your employer could hold this process up for months, in many cases, creating what coud become more than just lost time invested but the chance that had you failed to catch any inaccuracies in your plan – something that is your responsibility – could change what you thought you had into something quite different.
Keep in mind that leaving an employer is often done on less than happy terms, the employer may take their own sweet time getting the process complete. While ERISA rules govern these transfers, proving your employer did not follow the rules creates a whole new layer of problems – as you settle into your new job. This financial tether can be more of a hassle than anyone wants. The more unpleasant the departure, the greater the chances that this process could last for months, if not years.
Accounting for your 401(k) and providing accurate and worthwhile information often falls to whatever department in your company is charged with its management. There is no guarantee that this person is able or capable of making the transfer correctly or in a timely fashion.
Keep in mind, that investor complaints with mutual funds are handled by the SEC. With a 401(k), no such government protection agency is in place to ensure fairness or accuracy. The Pension and Welfare Benefit Administration in conjunction with the Internal Revenue Service can be contacted for any problems; just keep in mond that they admit to having too many plans to oversee and although this is not a comforting thought, they will look into problems based of predication. In other words, your complaints will fall on mostly deaf ears.
401(k) plans do allow the employee to contribute more on a pre-tax basis than you can in an IRA (although utilizing a Roth IRA could help offset this problem) and these sorts of problems may never happen to you. But you can hedge your risk and the danger with the following option: Invest in your 401(k) up to 5%; then max out a Roth IRA; then, if there is any money left, go back to your 401(k) plan. For the vast majority of investors, the first two suggestions will be as far as you get. Which is fine and could provide you with not only a leg up on your taxes but also on your ability to control the risk.
But be warned: check those statements very carefully. In a 401(k), you only have 30 days in which to point out any problems. After that, you are left to languish.
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