How To Fix Your Lousy 401(k) Retirement Plan: Pool It, Like a Pension Fund

I agree with the basic premise of this approach. However, I believe there is an alternative approach. to improving your plan and turing it into a pension fund ‘like’ plan without all the concerns of this approach. Most if not all investors are incapable of doing what needs to be done when it comes to successful investing.

President George W. Bush signs into law H.R. 4...
President George W. Bush signs into law H.R. 4, the Pension Protection Act of 2006, Thursday, Aug. 17, 2006. Joining him onstage in the Eisenhower Executive Office Building are, from left: Secretary of Labor Elaine Chao; Rep. Buck McKeon of California; Rep. John Boehner of Ohio; Senator Blanche Lincoln, D-Ark.; Senator Michael Enzi, R-Wyo., and Rep. Bill Thomas of California. (Photo credit: Wikipedia)

I’m not one who’ll argue that the average investment professional can beat the stock market indexes. But a seasoned professional can excel by reducing the fees that many mutual funds charge and making sensible choices on how to allocate your employees’ retirement dollars in a constantly changing economic climate.Let’s start with those fees. The Center for Retirement Research studied the costs that afflict a typical self-directed 401(k) plan. Administrating the plan normally costs 0.1 to 0.2 percent of assets—peanuts. The heftier charge is the 1.3-1.5 percent whack for managing the investments.

Half of that 1.3-1.5 percent cost is disclosed by the portfolio managers who operate your mutual funds. You know them as the funds’ “expense ratios,” which include the 12b-1 fees that pay for the marketing and selling of the funds as well as communications with shareholders. But the other half, the researchers explained, are trading costs—bid-ask spreads and commissions paid to market makers and dealers. Neither of these trading costs are disclosed. They’re excised from a mutual fund’s profits by the traders who fulfill the fund’s buy and sell orders.

In the hands of a good investment pro, the trading costs and management fees should be significantly less. For one thing, if all your employees’ retirement funds are pooled into a single large account, the manager will be able to use exchange-traded funds or directly invest in stocks, bonds and real estate investment trusts. These alternatives can have lower trading costs, avoiding the expenses mutual funds incur by having to be constantly ready to sell investments and provide a lot of liquidity to nervous, impatient retail investors.

There is an alternative to the pooled 401(k) plan which reduces the concerns stated in this article. The Pension Protection Act of 2006 allows plan sponsors to automatically enroll employees in an age appropriate portfolio. The employee has the option of signing a simple agreement and choose their own fund mix.

Please comment or call to discuss how this affects you and your company 401(k) plan.

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