You have to be a certain age to appreciate how retirement planning has changed. I am, unfortunately, that old. So for you youngsters, let’s take a walk down memory lane.
Long, long ago, a retirement plan was having enough kids so that you could move in with one of them when you got too old to work. Then came Social Security and company pension plans that paid you a monthly income for the rest of your life. Retirement benefits – including medical benefits – got richer over the years until some companies, like General Motors, were described by their financial chiefs as “retirement plans with a car manufacturing subsidiary.” And so GM went broke, largely under the weight if maintaining a massive retirement pension and medical benefits plan. Other companies took notice and today the pension plan – known as the “defined benefit” plan – is fast becoming obsolete, replaced by the 401(k) type plan known as the “defined contribution” plan.
“Defined benefit” meant that you knew what monthly benefit you were going to get in retirement based on some formula that included years of service and salary. “Defined contribution” meant that you knew what you were putting in, but not what you were going to get when you retired. The switch from defined benefit to defined contribution means that the responsibility for a secure retirement was switched from the employer to the employee. That’s why it’s so important to know and understand the investments available in your 401(k) plan.
When 401(k) plans were first introduced the investment choices were fairly simple. You could pick a stock mutual fund, a bond mutual fund, a fixed fund or put your money into company stock if you worked for a publicly traded company. Then the federal regulators and the financial wizards of Wall Street came along who said that those basic choices were not enough. That’s why the typical 401(k) plan today has scores of choices and is so confusing.
The average worker is not an investment expert. He or she goes to work, collects a paycheck and puts some of his pay into his company’s retirement plan – often without knowing what the choices are or how they may affect his future. And that’s critical because for many people their 401(k) plan will be their largest single source of retirement income once they quit working.
If they go to the company benefits department for advice, the chances are that they will not get any. The reason is twofold. First, if a company employee provides advice regarding investment options, they expose the company to serious liability. Second, the people in the benefits department are not investment professionals; they do not necessarily have the expertise to counsel people and provide them a roadmap to retirement.
The typical investment firm is little help. They make their money from fees or commissions on assets they manage in-house. The 401(k) custodian is also little help. Some may have some on-line software that people can access, but no one that they can talk to about their plans or dreams.
For those seeking guidance regarding the array of investment choices open to them in their 401(k) plan, independent firms of financial advisors have begun offering advice, for a fee, without requiring employees to open an investment account. If you participate in a 401(k) plan and wonder whether your investment choices are the right ones for you, you may want to look into this. It may mean a more informed and better prepared retirement plan.