October 2004

October 2004 STATE OF THE 401(k) ADVICE INDUSTRY or Three Retirees Walk into Wal-Mart, and the first one asks…..

“ Will I have enough money in my retirement?” The second retiree asks, “How should I invest my money right now?” The last retiree completes the list of the three biggest questions retired or about-to-be retired investors have. That is, “What do you do when the stock markets change like they have so often over the last few years?”

Many times a picture answers a question better than anyone’s expert opinion. When you look at the chart on the next page, remember how important the S&P 500 performance is to world or stock market
investing….
S&P 500 stocks control over 75% of all stock market
capitalization.
S&P 500 stocks control over 75% of all equity mutual
fund assets.
S&P 500 stocks control over 65% of all the Large Cap mutual funds that dominate 401(k) plans.
Through the end of 2003, the average equity mutual
fund has an 87% correlation to the performance of the
S&P 500 Index.

So a buy-and-hold stock portfolio---fully invested, every stock market trading day, from January 2000 to the end of September 2004---lost over 27% in just short of five years. If that is not scary enough, look at the arithmetic involved in “getting your money back.” 27 divided by (100-27) = 36.98 percent. So when you lose 27% of your money, you need a return of almost 37% just to get your investment back. That is a little scary for a soon-to-be-retired investor. This investor does not have the time remaining in his or her career to make those losses up. Those numbers are down-right frightening to an already retired investor. You need your money now, and you and your previous employer are not making any more contributions!

The main point I want to make in this presentation, is the poor quality of
retirement plan advice alternatives currently available to retirees or pre-
retirees. Here is what a 401(k) plan participant has had to choose from for
the professional help he or she needs to protect and grow retirement plan
dollars.
Investment education provided by retirement plan employer . If you can
describe a year-old mutual fund prospectus and marketing brochure
handed out at the annual Retirement Plan Enrollment Meeting as
“ investment education.”
On-line 401(k) plan investment advice . The experts really thought that
this product would work a few years ago. Using on-line software to tell
a retirement plan participant how close they were to their retirement
goals. No information on the most important question of, “what do I
invest my retirement plan money in?” Just information on how close
you are to your retirement goal.

The availability of Lifestyle mutual fund options in the retirement plan menu . This is my favorite band-aid solutions to help retirement plan participants. The retirement plan sponsor acknowledgement that retirement plan participants are so ignorant of investment basics, the retirement plan sponsor has to offer mutual funds that place your retirement plan money on “auto-pilot.” That is, you just pick the date you will retire, and match it with a mutual fund option in your retirement plan with that same date. You place all your money in that mutual fund, along with future contributions, and you will be able to retirement with no problem. Right. Your retirement condominium will be located in the same building as The Tooth Fairy. In fact, you will be on the same floor as The Easter Bunny.
Professionally Managed Accounts available in 401(k) plans . These accounts are offered by the same money managers that invest your retirement plan mutual funds. In each calendar year, less than 15% of these mutual fund managers out-perform the S&P 500. And these money managers are not the ones available in your 401(k) mutual fund menu. See the previous chart on the performance of the S&P 500 over the last four years for the remainder of this answer.

None of these retirement plan offerings will work, or were ever designed to work because they don’t provide a retirement plan participant with the information necessary to make informed decisions on how much risk he or she wants to take with his or her retirement plan money. Any stock market investor can make an informed decision if he or she gets the right information. But as the above examples suggest, there is no current delivery system available to a retirement plan participant to get him or her the right information. Retirement plans are set up to benefit the company sponsor---the retirement plan is as low-cost as possible and as free as possible from any future liability on the part of the company. In addition, retirement plans are set up to benefit the retirement plan provider. That provider has a captive audience of employees funding their retirement plans every month with as much money as possible to ensure a safe and secure retirement. The retirement plan sponsor gets paid on the accumulation of these dollars every year. Performance is not important---only the added dollars from plan participants.

The only option that will ever work, for current retirement plan participants, retirees, and about-to-be-retired investors, Is to
work with and advisor who understands stock market risk.
An advisor has to help you understand these basic stock market
risk-management questions:
Is the current stock market configured to make you money or to
take money away from you?
Where is the current out-performance in the stock market? Large,
Mid, or Small Cap? Value or Growth investments?
What is your plan if things go wrong? What is your stop loss point
for the different parts of your stock market portfolio?

October 2004

by Breticase on Feb 07, 2010

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