Don't gamble with your retirement!
(MoneyWatch) Last week PBS aired "The Retirement Gamble," a documentary that was intended to alert and shock the general public about the problems with 401(k) plans. The documentary exposed the hidden and high fees charged by certain mutual funds in 401(k) plans, and whether advisers were giving appropriate advice to investors that adheres to fiduciary standards.
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I applaud PBS for airing real problems that need attention and possible correction by some 401(k) plan sponsors. But the real question for you -- our readers -- is, what will you do about it?
First, some observations: Nothing is free -- you've got to pay something for investment and administration fees. So your first step is to move beyond any shock from the show and learn about the investments that are available to you. Don't let the film's headlines give you an excuse not to save or plan for retirement. Take responsibility for your future, because the reality is that nobody cares as much about your retirement as you do.
There are 401(k) plans that offer funds with low fees and good performance history, and there are 401(k) plans that offer funds with high fees and poor investment performance. Do you know what type of plan you're invested in? If you work for a large employer with thousands of employees, there's a good chance that smart people in your employer's finance and HR departments have shopped for funds that offer better terms than you could buy on your own on a retail basis. But don't assume you're OK.
Instead, see for yourself what funds are in your 401(k) plan with the new fee disclosures that went into effect last year. Review your plan's disclosures -- don't make the mistake that most people make and throw these in the trash. That's like throwing away money.
Look for funds with annual expense loads under 1.0% (100 basis points) -- the lower the better. Many large 401(k) plans offer funds with annual expense loads under 0.5% (50 basis points). The best I've seen is a plan offering an index fund with an astonishing expense load of just 0.02% (yes, that's two basis points). You can't get that anywhere on your own.
On the other hand, your 401(k) plan might have high fees -- 1.5% or more; these are more common at small employers. Should you bail out of that plan? Not necessarily. At the very least, you should invest the maximum that's matched by your employer. The employer match will overcome any disadvantage from high fees, so if you get the match, you're still better off contributing to a 401(k) plan with high fees compared to not contributing at all.
The vast majority of American workers who participate in 401(k) plans don't contribute the maximum matched by their employer, which means they're missing out on "free" money for their retirement plans. If you max out your employer match and are in a high-fee 401(k) plan, look for other ways to invest your retirement savings; they're out there, you just have to look.
And this points to a much bigger problem for our collective retirement security: People just aren't saving enough for retirement. Your employer may offer a plan with the best funds in the world, but if you haven't saved enough money, it won't matter because you won't have a secure retirement. On the other hand, if you have enough money even in a crummy 401(k) plan, you have a good shot at a secure retirement. Once you retire from your employer, you can always roll over your accounts to a financial institution that offers investments with low fees and good investment performance history.
The reporter for the PBS story recounts his own circumstances: He took out loans to pay for his children's college education, and his resources were drained by a divorce. As a result, he may have to work until age 70. This points to bigger problems than high fees -- your life choices and circumstances will often have a much larger influence on your retirement security than the specific investments you choose.
And why do we think it's bad that we need to work until age 70? The reporter looks to be in good health and probably has a college education with above-average income. This all points to a potential life expectancy that's well above average -- there's a good chance he'll live to his late 80s or early 90s, higher than previous generations. It takes a lot of money to fund retirements that could last 25 or 30 years, which is the case if you retire in your mid-60s. It's much more realistic and takes less money to fund retirements that might last 15 to 20 years, which implies working until your 70s.
It turns out that the real "retirement gamble" is our own behavior. Are you saving enough? Do you have realistic expectations about when you can retire? Do you spend the time it takes to properly prepare for retirement, including learning about your investment options and figuring out how much you need to save? Do you manage your spending and budget "just enough" to meet your needs and make you happy? If you don't have good answers to these questions, then you truly are gambling with your retirement.
Steve Vernon
View all articles by Steve Vernon on CBS MoneyWatch»
Steve Vernon helped large employers design and manage their retirement programs for more than 35 years as a consulting actuary. Now he's a research scholar for the Stanford Center on Longevity, where he helps collect, direct and disseminate research that will improve the financial security of seniors. He's also president of Rest-of-Life Communications, delivers retirement planning workshops
and authored Retirement Game-Changers: Strategies for a Healthy, Financially Secure and Fulfilling Long Life and Money for Life: Turn Your IRA and 401(k) Into a Lifetime Retirement Paycheck.
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