401k Problems

401k's are vital to many people's retirement, however, they often do not receive the attention they deserve.  These retirement plans are more and more important as they have been steadily replacing pensions for years.  Most people are not comfortable making investment decisions and until recent changes many users didn't even sign up for the plans.  Even when people use 401k's there are a few problems I have encountered:

1.  Conflict of Interest.  I worked for two blue chip corporations and both of their 401k plans left room for improvement.  The first company was a very large company with its own financial unit so it was able to offer many of its own funds in the 401k.  First, that strikes me as a conflict of interest.  Yes, one or two of their funds were probably cheaper than the norm to own, but I can't say their performance was stellar.  

2.  Limited Choices.  I was very disappointed to find how limited the options are in 401k plans.  I don't know why this is the case - maybe they are worried about confusing investors, but more likely it's cheaper to administer these plans.  However, given that my future retirement fund is stuck here I want to be able to invest appropriately - attempting to diversify and improve returns.

3.  Lack of Education.  We have virtually no personal financial education system in this country.  Maybe you learn how to balance a checkbook in High School or you take a business class or two, but regardless it is totally inadequate.  So, for our government and corporations to assume that people will invest their savings appropriately is kind of a joke.  First of all, many people don't even know how 401k's work and/or are unsure what to invest in, so they don't even invest.  Among those that invest, it is not uncommon for people to invest in their own company's stock which of course can be a recipe for disaster.  Yes, many of the retirement account companies offer tutorials, but if a person lacks basic financial knowledge, has not interest or is too busy, than it won't help much.

A new company I read about recently, BrightScope, rates retirement plans.  I think the concept is great, and it's a good step towards adding transparency to this vitally important area.  I can't say for sure how accurate and/or helpful this company is, but I hope it helps.


Lastly, for better or worse, many people leave their jobs often, so we do have the ability to roll-over our 401k's into IRA's, which will give us more investing options.  This is good for savvy investors, but might actually be a disservice to less savvy investors as some people even forgot about their 401k's when they leave their job or decide to cash out. 


While I have not read any books which focus specifically on 401k plans, I found Jack Bogle's Common Sense on Mutual Funds to be an excellent introductory guide.  John Bogle founded the Vanguard Group and he is an advocate for low cost index funds.  This book will help you learn more about mutual funds - from fees to what to look for in the management.  While it won't teach you everything you need to know about investing, it will make it a lot easier to learn more (if you want to).  Visit Apellicon's Investing section for more helpful investing books.