Tuesday, May 5, 2009

401(k) Backlash Coming

There is an article in today's WSJ about how some 401(k) plan sponsors are suspending withdrawls or limiting the amount that investors can withdraw annually. It's pretty outrageous, really.

When hedge funds last year implemented gating in an attempt to avoid full-bore fire sale mode, not too many folks were up in arms because this mostly affected institutions and the super-rich. Now it is happening to mom and pop.

I think a story that is going to be written a lot over the next year is that investing in a 401(k) plan is a bad idea. This is not my opinion but I can see how one can get there. The benefits of a 401(k) are well-know. You contribute pre-tax dollars, the annual limit is high relative to IRAs, the gains grow tax-free, sometimes your employers match all or a portion of your contribution.

The negatives, other than the fact that some people as noted above cannot readily access their money?

  • Plan participants get almost no help with their allocations, and most people know little about investing
  • Tons of people allocate poorly and novice investors are often hurt the most by bear markets
  • Investors have actually lost money on some of the contributions they have made in the last two decades, over long investment periods
  • The fees paid, as 60 Minutes pointed out last month, to the fund managers and the plan sponsors/admins, are considerable

If no big insurance compny fails (other than AIG which no longer counts), look for the annuity industry to emerge as a real rival.

No comments: