Are Retirement Plans Sold Backward?

The 401(k) plan was first introduced in 1981 as a supplement to a defined benefit (pension) plan by a bank seeking additional retirement funds for executives. It has been sold to companies, as a supplement, since then.

Pension (Photo credit: Frederik Seidelin)

The 401(k) plan as well as all qualified plans, ie, IRAs, Simple IRAs, SEPs, Roth IRAs  are sold by offering list of top performing mutual funds and requires the investor to choose the right mix This is a huge mistake because it utilizes the three elements that turn investing into gambling and speculating.

The elements of gambling and speculating are stock picking, market timing and track record investing.

Research has proven that investors, with and without brokers/agents, underperform the benchmark indices by a significant amount. Additional research proves that a vast majority of actively managed mutual underperform.

For these reasons I believe qualified retirement plans are being sold backwards. It is a mistake to offer a huge amount of fund choices and expect investors to make the right decisions. It is important to understand that providing too many choices results in poor outcomes..

Since most stockbrokers and insurance agents do not act as fiduciaries to their customers they have a vested interest in keeping money on the move. These Wall Street bullies make money whenever their customers trade from one strategy or asset class to another.

It’s important to remember that investors do not have to know everything about investing but they do need to know the right things.

These qualified retirement plans should be invested like a pension fund.  The pension funds goal is to have sufficient money to fund your retirement. Their strategy is to control risk, so as you age, the risk of your portfolio is reduced.

There is scientific and academic based research to develop appropriate portfolios. Utilizing this free market strategy, anxiety and worry are dramatically reduced.

When investors take a more long term view of their investments the result will be improved performance with less anxiety. When uncertainty is reduced investors will save more and enjoy life.

There are three simple rules of investing….own equities…..globally diversify…..rebalance.

This message is redundant however, so very important. Following these simple rules will lead to success long term. However, the greatest challenge investors’ face is controlling their own emotions. This requires the assistance of an objective advisor or coach. A fiduciary adviser if you will.

Making emotional decisions in your retirement account(s) is the most destructive trait of most Americans.

When plan sponsors provide a pension fund like plan everyone wins.

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