401(k)

The 7 July, Fresh Air was all about retirement planning. Most of the discussion was about IRC 401(k) Plans, the most popular type of retirement plan. I’m a big Terry Gross fan, but she didn’t moderate a balanced topic on this particular show. Her guest was economist Teresa Ghilarducci, author of When I’m Sixty-Four: The Plot Against Pensions and the Plan to Save Them.

Ghilarducci ruled the airwaves on this particular day. She presented a one sided argument and Gross barely gave her a fight. Every time Gross said, “It can’t be,” Ghilarducci ran off with the conversation again. I was driving, so I didn’t catch everything she said, but I was able to jot a few notes down. Part of her argument was this:

  • Employers don’t have their employees in their best interest when they implement 401(k) plans
  • Employers are in bed with their advisors and often get side deals or other benefits for choosing a particular plan provider
  • Most employers don’t present a diversified selection of mutual funds to choose from
  • Many employers load up the plans with their own company stock
  • Employers don’t educate their employees. It almost sounded like she was arguing that employers purposely keep their employees in the dark.
  • Plan fees are high and employers don’t do much to change that
  • Employer matching funds are paltry
  • Index funds (passive investing) are a much better portfolio choice than managed funds (active investing)

Now, this isn’t all she discussed, but she made some extremely broad generalizations about employers. It is likely that she has proof that these problems exist and that there are employers guilty of each of these transgressions. I’m no expert on the subject of retirement planning and she spends most of her time focusing on it, but I’m entitled to my opinion too. Ghilarducci should have demonstrated some restraint when given free reign on the air waves. Gross should have had another expert on the program to present an alternative perspective.

Naturally, people are concerned about their retirement plans. I am. As are the employees that I have responsibility for at Horst Engineering.  We are all concerned. The first two quarters of 2008 have seen hefty declines in the average retirement account. The more you are exposed to the equity market (stocks), the bigger your losses have been. Hardship withdrawals are also up. Part of this is driven by the cash crunch that has affected many people, especially homeowners with adjustable rate mortgages. The housing market crash, credit crunch, energy inflation, and food inflation have left most people with far less disposable income at the end of the week. 

So, why was Ghilarducci off base? Well, she made the mistake of lumping all employers into one bucket, the bad bucket. Of course there are horrible employers out there. There are those that are greedy. There are those that lack values. There are those that are outright fraudulent. Horst Engineering isn’t any of those things. On the contrary, we have done our best to inform employees about the need to think long term.

  • We have given them opportunities to learn more
  • We have brought in outside experts to speak about investing and long term financial planning
  • We have proactively negotiated lower fees for all participants
  • We don’t charge the plan for administrative fees
  • We allow instant entry into the program
  • We provide a diversified selection of funds, including index funds and actively managed funds–this is a small group that is analyzed and revisited frequently
  • We offer a match that is commensurate with the market and our industry
  • We constantly evaluate our mutual fund platform, our brokers, and our third party administrator–it is there job to get it right

I’m sure that other employers do the same and possibly even better. Nonetheless, if Ghilarducci was talking about us, or the other small and mid-sized businesses that actually have real values, then she did us all a disservice. Her presentation was one sided and if she is to be believed, then we all should be suspicious of the benefit of 401(k) plans. 

The days of holding a job for life with a big mother corporation looking after workers are long gone. Pensions don’t exist like they used to. Small and mid-sized companies were never really able to offer pensions, so 401(k)’s actually offer a benefit that small employers previously couldn’t provide. These changes aren’t anyone’s fault. The dynamics of the economy dictate the changes. Nevertheless, there is a good chance that if you are going to have stable employment for a long time, then it is going to be with a small or mid-sized company. 

A successful retirement plan involves both the employee and the employer. Each of us bears personal responsibility for looking out for our own long term welfare and the the long term welfare of our family. Ghilarducci accurately pointed out that we should all be concerned about Social Security and other government funded retirement options. It is inevitable with the deficit that our government runs, that privately funded retirement should be the focus. And yes, employers who get tax benefits for having these plans also bear responsibility. As an employer and participant, I can only suggest that folks seek out more information so that they can be better educated on their own plan. Hopefully, the folks who listened to Fresh Air last week, take what they heard with a grain of salt.

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