Seeking New Investment Options in a 401(k) Plan
Recently I wrote a piece on how a 401(k) plan can make lousy retirement plan. One of the reasons I cited is the lack of high quality investment options in the plan. The missing qualities can include low-cost, variety, and suitability to changing market conditions.
A Visit from the 401(k) Plan Representative
This week our firm had its annual visit from a representative of the organization that administers our 401(k) plan. The organization is essentially a management trust that was formed by an attorney trade group, the American Bar Association. The board of trustees that runs the Plan enters into investment management and record keeping contracts with different businesses to provide those services.
The ABA Retirement Plans organization has been around for 40 years. Over 4,000 different law firms participate in the Plan. With this scope, the Plan now manages over $4 billion in 401(k) assets. This gives the Plan a lot of resources and flexibility in selecting investment options, including designing its own. Yet, like so many other 401(k) plan managers, it has not kept itself on the leading edge of those options.
To solve that problem for my situation, I moved my 401(k) assets into a self-managed brokerage account, which is the key strategy that a Plan participant can follow to escape the more limited investment options offered by the Plan itself. Nevertheless, I decided to attend the meeting with the Plan representative when she came to our office. I had heard of changes in the wind and I had a few questions about the impact of those changes.
The significant change was that the Plan trustees had solicited bids and then selected a new investment manager. This means (we are told) that new investment options would be coming. We were also told that, due to SEC and ERISA regulations, we could not be given information about these new options until they had been officially approved.
Asking Questions about Plan Investment Options
This did not satisfy Mr. ToughMoneyLove’s curiosity so I threw my hand up. I told the Plan rep that I believed the Plan was missing some key components of what many pre-retirees might need in a proper asset allocation. I specifically named a TIPS (Treasury Inflation Protected Securities) fund, real estate (a REIT fund), and commodities (e.g., precious metals and oil). These were sectors that I had accessed in my self-managed account but I felt needed to be available to everyone planning for retirement.
The Plan rep immediately started nodding her head, as if acknowledging that there was truth in what I was saying. Then she said (in a manner suggesting that she wasn’t supposed to say anything yet) that the new investment adviser was structuring an investment that combined TIPS, REIT, and commodities into a single fund, separate from bonds and equities. That caught me somewhat by surprise because I had never seen or heard of a fund that combined those three diverse asset classes into a single investment option. In one sense I was pleased that someone was at least thinking about the problem. On the other hand, I am reserving final judgment on this fund option until I see precisely how it is structured.
Seeking New Investment Options in Your 401(k) Plan
The real point of this little story is that 401(k) plan participants need to be actively skeptical about the investment options presented to them by the advisers and trustees of their employer’s plan. If things don’t seem right, ask. if they still aren’t right, complain. Being pro-active is more important now than ever.
To some extent, plan administrators (including employers themselves) have a fiduciary obligation to provide plan options and features that make sense and that provide a real benefit to participants. If enough people calmly but firmly let those folks know that someone really isn’t doing a very good job in that department, they will eventually get the message. As one of the owners of our firm, I know that it would get my attention. In fact, we switched our plan to the ABA Retirement plan some years ago because our former plan provider had investment options that just were too expensive across the board compared to other plans. That knowledge was a catalyst for change.
The other 401(k) plan feature you should investigate (and you may already have) is the self-managed brokerage account option. This puts a full array of investment options in front of you and allows you to be your own financial planner. For the right person, that can be a good thing or even the best thing.
The hard truth is that you need to look out for your own money. Seeking help is fine but the responsibility for your financial future is 100% yours.
Image credit: Robin n