If you haven’t seen it yet, the CBS News show 60 minutes aired an episode this evening entitled: Retirement Dreams Disappear With 401(k)s.
This 60 minutes episode couldn’t have come at a better time.
A friend just informed me on Friday that she has multiple 401k plans from previous employers, that she hasn’t rolled-over in an IRA. According to her, she finds it easier to leave them in each of her previous employer’s plans. Little did she didn’t know that there are costs associated her strategy.
I explained to her the hidden high costs of leaving retirement savings in an employer’s 401k plan, and further explained the benefits of rolling a 401k plan into a single rollover IRA, preferably into an already diversified Target Retirement Fund at a low-cost mutual fund provider such as The Vanguard Group. Maybe this 60 minutes episode will help explain 401k fees better.
But, I’m also writing this post because there are some important issues that, in my opinion, 60 Minutes failed to address.
The most important issue missed was the topic of asset allocation.
Although I disagree with the biased views of David Wray, president of the Profit Sharing/401k Council of America and a lobbyist for the 401(k) industry, he’s right when he says the 401k plan itself isn’t to blame.
The blame actually lies with each individual 401k plan investor who didn’t appropriately allocate portions of their 401k savings into different assets based upon their age and tolerance for risk.
The reason that many individual investors have lost half of their life savings is because they most-likely had their 401k savings invested in stock funds, instead of being appropriately diversified into less-risky bonds, treasuries, or money-market funds.
60 Minutes was likely hesitant to say this because telling people it’s their own damn fault doesn’t draw much sympathy or sensationalize the story.
Another issue that I have is with Mr. Wray stating that a 401k plan is the best source for saving towards retirement. That’s not always true and 60 Minutes should have addressed it.
A matching 401k plan may be the best source for retirement savings available, but if an employer doesn’t match contributions, a good argument can be made that a Roth IRA is the best retirement savings tool available.
The last issue that should be addressed is the following paragraph:
“Most of the people that we’ve talked to are 50 and 60 years old and have sustained these losses say there is no way they’re ever gonna make them back. Do you agree with that?” Kroft asked.
“I think we have to be truth tellers,” Wray replied. “I think that when a person has hit this point, and we’ve had this unfortunate situation, I don’t think we can misrepresent what the possibilities are.”
“And reality is that money’s not coming back that they’ve lost,” Kroft said.
Let’s not credit Mr. Wray with being correctly clairvoyant. Who’s to say that the stock markets won’t rebound and return what we have lost? As a matter-of-fact, history has proven just the opposite.
Folks, if there’s anything we can take away from this 60 Minutes episode, it’s that we need to take a proactive stance in managing our own finances. Instead of whining about our losses and looking for someone else to blame, we should become better educated about personal finance and investment, and not assume the financial industry puts our interests above their own.
Stay skeptical of those who tell us that they can manage our money better than we can. No one cares more about our life savings than us.
Comments 5
I just worked with a friend to get him started in the markets. I told him to read a couple of books and generally look for some beginner’s guides on the web. Not to mention some investing to avoid. His response after all of that was to buy some Ford stock cause it’s cheap. Oh well welcome to America.
Posted 20 Apr 2009 at 6:36 am ¶You can lead a horse to water, but you can’t make him drink.
Posted 20 Apr 2009 at 8:58 am ¶60 Minutes blames the usual suspects for the fact that a 401k plan does not guarantee lifetime benefits like the old defined benefit plan that has disappeared from corporate America because it was too expensive. What is ignored is that for most workers who will change jobs between 8-10 times over their working careers, steady contributions to a 401k plan will provide greater benefits than a defined benfit plan because the 401k contributions are fully vested and can be transferred to a low cost IRA every time you switch employers. Defined benefit plans only benefit long term employees who spend their entire careers with one employer which is an impossibilty today. But that message does not play well with the media who is looking to blame the mutual faund industry for the collapse of the economy. But then in five years most of the financial columnists and TV reporters will be out of a job because of declining advertising revenue due to the internet. Its no accident that the NT Times and CBS are both trading at 15 year lows of about $5 a share. Too bad, too sad, they wont be missed.
Posted 21 Apr 2009 at 3:06 pm ¶@maverick the funny thing about the news outlets, is that some studies have shown that the increase of information available about financial markets (through outfits like CNBC) have actually increased volatility. In market game studies, participants making trades with no information besides a price ticker, faired better than participants with a constant variety of information. The market may in fact be better off if all of the news outlets just shutdown… Hah! (see the book The Wisdom of Crowds by James Surowiecki)
But as far as the 401k’s go – it’s just unfortunate how many people out there have no clue about what they are shoving their money into. Greed should at least be on par with knowledge.
Posted 22 Apr 2009 at 10:03 am ¶Am I supposed to believe that CBS found two people who happened to bring their 401(k) statements to a job fair? Come on. CBS staged the whole thing…like they always do and then edited David Wray’s comments to spin this story the way they wanted.
I agree with @Maverick that most people are looking for someone to blame and want Congress to bail them out of their own greed or ignorance. This is easier and more appealing than facing the truth and taking responsibility for our own actions.
Posted 29 Apr 2009 at 12:38 pm ¶Post a Comment