401(k) Plans Are Designed for Mediocrity

[marmar]

HUNT VALLEY, Md. (TheStreet) -- Your 401(k) account probably contains 10 to 20 investment choices. In that group, there are likely five or more lifestyle or target date funds, which really are not specific investment options. A lifestyle or target date fund is one that manages the employees' money between stocks, bonds and cash based on the age of the participant. The closer participants are to retirement, the more they will be in bonds and cash. The younger participants are, the more funds are invested in equities.

The other funds offered in a 401(k) normally are a mix of large cap, midcap and small cap, bonds and international funds. The reason for this small, diverse group of funds is to allow people to create an asset allocation model based on the efficient market theory -- which is blatantly false.

Understanding the typical investment will help people understand why 401(k)s are intentionally designed for mediocrity.

First, let's examine the lifestyle or target date funds. The concept that age dictates investments is foolish. Let's assume it's 1966 and you have $100,000 (a great deal of money in those days) and are 50 years old. Over the next 15 years as you approach retirement this age-investing philosophy would have moved you out of stocks and into bonds at the worst possible time. Age should affect goals, but never the actual investments. ................(more)

The complete piece is at: http://www.thestreet.com/story/11075411/1/401k-plans-are-designed-for-mediocrity.html?cm_ven=RSSFeed

[cbdo2007]

1. You do realize they are trying to get people to invest directly in stocks themselves.....

rather than the 401K. That's the point of "thestreet" is it is a stock picking company.

For the average, everyday person - of course they get mediocrity, because they don't have the time to study and make decisions on what stocks they want to invest in themselves so rather than get 15% per year they settle for 4%, yet it is a lot safer.

[dkf]

4. Exactly.

I wish my 401k had more options too, but it's designed to work for all types of plans and particularly geared towards the less experienced.

[tammywammy]

5. My 401k has a lot of options

I think it's because I work for a large corporation. They do offer the typical funds based off age, but you're not required to invest in it. The 401k is through ING, which offers advice either one-on-one adviser or via their web-based tool. I've used it, and it gives you good advice on how to diversity your funds out, and it doesn't recommend those "target" based on age funds. It also explains what's what.

I understand a bit about mutual funds, etc, but I'm definitely not a "savvy" investor - like the majority of people. I don't want to try and investing in individual stocks, etc because I don't want to fuck it up and lose what I have saved toward retirement.

[earthside]

2. A giant bubble.

The 401K law was passed in 1979 ... and it is part of the biggest stock market bubble ever.

Most folks have no business in the stock market to the level the 401K demands -- ie., this is your retirement.

So, much of the stock market's jump from being in the Dow thousand point range to it being often in the 10,000 range is because people were forced into the market.

As baby boomers increasingly have to sell-off their 401K holdings, the market is set to decline -- this explains why the Repuglicans and corporate Democrats want to get Social Security money into the stock market (privatization).

Indeed, most 401K fund managers are very conservative ... unless you actively manage (and your plan allows you to manage) your own holdings, you're going to have a lot of difficulty acquiring enough money with which to retire comfortably.

I put our money in gold stocks way back in 2000 ... and I've done quite well (and I pay close attention to what is going on everyday). But I had to do it myself because the fund plans offer no creative baskets of stocks, mutual funds or bond funds.

[dkf]

3. Here is your reason:

"Another reason is that most plan sponsors are afraid of the "do-it-yourselfers." Most do-it-yourself investors are not all that good at investing, but they enjoy gambling, and investing is not gambling"

[badtoworse]

6. I completely agree

Many, many people are completely ignorant when it comes to selecting appropriate investments for their particular circumstance. Such people are far better served by investing in a balanced mutual fund and letting pros manage their money.

Many 401k plans feature a match by the empoyer up to a certain percent. My last employer matched up to 6% of my salary - only a fool would not take full advabntage of that.