Sunday, December 10, 2006

Taking "Sides"

I was trolling around on the Internet last weekend, when I saw a story titled “The Downsides to Your 401(k).” Needless to say, I was intrigued by the headline (I’m sure that was the intention), which turned out to be a lead-in to an interview with Smartmoney.com Editor Ray Hennessey.

There was an interesting pull quote designed to further whet the interest of the casual reader: "If your company goes belly-up, you're left with a lot of company match that you thought was automatic money, (and now) it's gone."

Well, right off the bat, I’m thinking the real downside in this article is its portrayal of the truth—after all, a company’s bankruptcy doesn’t put the match at risk. So, I read on.

Turns out, the pull quote was lifted out of context. The words were accurately quoted, but were presented without the benefit of an introductory sentence that clarified that the match put at risk was a match made in company stock. A situation that Hennessey said occurs “often.” Well, it’s common enough in large companies, of course, but a relative rarity elsewhere (the last statistics I recall seeing on that phenomenon indicated that something like 16% of plans offered it as an option, and I suspect that fewer mandate the match in that currency). And, of course, since the Enron implosion, a growing number of those firms have made it easier for workers to shift money from that investment on their own—and the Pension Protection Act contains provisions designed to deal with the rest.

Another downside: The fees companies charge to manage retirement accounts are “often” too high. Okay, I get fees as an issue. But “often” too high? Is it the same “often” as the company stock match? Are they “too” high relative to what you’d pay for buying similar funds in a retail IRA? What is too high, anyway?

The remaining downsides struck me as a bit contradictory; first, that you’re “forced to choose from the funds that your company decides to participate in”—a menu that might not be sufficiently diverse. The other, that “lots of times” there are too many funds to choose from.

Now, I suppose that having one’s choices limited would feel like a disadvantage to some, even being forced to choose from a menu that has, at least ostensibly, been selected and reviewed by a prudent expert (or one who has enlisted the services of same). I’m not sure how that squares with having too many options to choose among (though with an industry average of nearly 20 options to choose from, there’s certainly merit in a concern about too many). However, I suspect the point would be that you can have too many, and still not access to the one (or two) you want. However, it is a perspective that seems very much less in vogue these days, as participants and plan sponsors alike warm to the allure of lifestyle funds and managed accounts.

Ultimately, the article concludes that one should consider both the good and the bad about their 401(k): “Familiarize yourself with your fund options and the fees involved. Know your investments. After all, it's your future.”

On that, at least, we can agree.

- Nevin Adams

The article is online (for the moment at least) HERE

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