Gold 401K

Gold 401k Erisa
Gold 401k Erisa

A senior executive called last week in a panic. Since senior executives generally don’t panic, I listened carefully. His concern? The 401(k) plan was bleeding money and he now worried about the significant postponement of not only his retirement plans, but those of his employees.

He’s not alone. People are waking up to the ugly fact that the 401(k) is not delivering on the promise of a comfortable retirement. There is not enough money. This problem is seen from two different angles. The employees and the employers.

The employees now realize that the 401(k) is designed to place all the responsibility of retiring on the shoulders of employees. If the employee saves nothing, the employee gets nothing in retirement. Further, the employee is now expected to become a sophisticated investor. The average employee is required to understand market cycles, standard deviations and generally accepted financial planning principles enough to replace a significant percentage of their current income upon their day of retirement. This is not happening.

The employer, on the other hand, wanted it this way. Why? It’s cheaper. Pension plans that promise a particular percentage of replacement income upon retirement, cost the employer more money. A lot more. Therefore, employers lobbied Congress heavily to replace plans that cost money with plans that were totally shouldered by the unsuspecting employee.

Now the chickens are coming home to roost.

Here’s what both sides need to do to fix this problem. First, employees need to get real about their level of savings. Today. It is simply not possible to replace your current income, which needs to last for the 25-30 years of your future retirement, unless you save between 10-15% or your current income. Further, the money that is saved must then be protected. Instead, most employees save far too little and invest in the wrong funds within their 401(k) plan. The average employee is far too aggressive and far too trigger happy, moving mutual fund investments around like day traders. This is a toxic combination.

The employer, on the other hand, needs to wake up to the fact that they are considered trustees under ERISA law. The Supreme Court decided in February 2008 that employees could now sue employers for employee investment losses. This is huge!

This means that unless something happens, Congress is going to lean towards demanding that employers reinstall the very expensive defined benefit plans of the past. Witness the congressional hearings on precisely this point on Tuesday October 7, 2008. In a collapsing market, participants cannot possibly retire, which means that society as a whole creates brand new wards of the state. Unless employers make changes, Congress is likely to get involved.

This is what employers need to do. First, begin a real matching program. Many employers provide no matching because it is considered too expensive. Believe me, though, matching is much cheaper than the alternative. Second, as a trustee get serious about investment education for your employees. What makes anyone think that the average machinist or administrative assistant is capable of designing her own pension plan? This probably means getting a new 401(k) provider. Unless your provider is committed to making a serious commitment to educating your employees, then your provider puts the employer at actionable legal risk.

This problem can be fixed without the Congressional action of mandating a grossly more costly solution for employers. Employees need education to save more and invest wisely. Employers need education in their trustee responsibilities under the law and take their 401(k) off the auto pilot mode.

Steve Meidahl, Retirement Plan Consultant, is an engaging public speaker and the author of the highly regarded book “Lessons Of A Real Life Investment Advisor”. When not writing or working with his national clientele, Steve enjoys cooking, playing jazz piano, karate and flying small airplanes. For further information concerning investments, pensions or retirement planning please visit Stephen O Meidahl’s website at http://www.stevemeidahl.com or read one of his many published articles.