401k Plans Are Retirement Programs – NOT

401(k) plans have replaced private pensions, transferring investment responsibility from investment professionals to investment amateurs

by Steve Selengut

Mr. Selengut is a private investor and a contributing editor to LIFE&Health Advisor. He is the author of the book ‘The Brainwashing of the American Investor: The book that Wall Street does not want you to read.’ He can be reached at [email protected]

Smack, right up alongside the head, 401(k) market values deteriorate rapidly as the stock market weakens. Who knew there was so much risk in those mutual funds and ETFs? The pain is most often temporary, but the timing of the recovery could alter participant retirement schedules and benefits— not to mention the hefty confiscation level from Uncle Sam.

The popularity of 401(k) plans is understandable. Employees get an instant employer “bonus”, a variety of investment products to choose from, and portability between jobs. The benefit to employers is greater — an easy, low-cost, employee benefit plan with no responsibility for lifetime benefit payments.

And this is OK, except where employees are required to invest heavily in company stock — a situation that has caused major problems in the past (Enron, for example).

401(k) plans have replaced private pensions, transferring investment responsibility from investment professionals to investment amateurs. Employees get little experienced guidance to help them select the right mix of investments.

‘Unbiased’ investment advice

Few HR counselors have degrees in or experience with investing, and wind up using the “unbiased” counseling services of fund salespersons. Interestingly, most product salespersons have no hands-on investment experience either.

The financial planning and accounting communities seem to have little concern about such basic investment tenets as quality, diversification, and income. QDI is the fire insurance policy of the investment plan, but few 401(k) participants hear about anything beyond past market value performance numbers and future performance projections. They are generally oblivious to the risks inherent in their investment choices.

This is where an understanding of Market Cycle Investment Management becomes important to 401(k) participants, benefit departments, and other financial pros. Investment Grade Value Stock investing is perfect for long-term, regular deposit programs. MCIM Portfolios use only IGVSI equities.

Take a good look inside…

401(k) investors need to understand the framework of a retirement program and, they have to look inside the products being offered. As much as I hate the idea of one-size-fits-all investment products, they are generally accepted as the best way to deal with larger employer savings programs.

Only when some form of financial melt down occurs does the head scratching and tinkering begin. 401(k) participants are absolutely impacted by the vagaries of market, economic, and interest rate cycles, but do they really appreciate the extent of their responsibility? Are they in good hands?

All individual investors need to learn how to assess the risks involved in the products they select. Typically, 401(k) investors simply switch from one “previous best performer” to the next, ignoring the cyclical nature of markets entirely.

They focus blindly on market value, ignoring the quality of their selections, and totally ignoring the income requirements of retirement.

Nowhere else in their lives do they adopt such a perverse strategy. And nowhere else in their thinking would they blindly accept the premise that any one number represents what is, or should be, going on in their personal investment portfolios.

Risk minimization begins with quality, is enhanced through diversification, and is secured with realized income.

The first two steps require research, greed control, and discipline. The income part just requires discipline and should be much easier to manage.

Strategic partitions…

If you can’t understand the individual securities within an investment product, and assess their overall quality, you don’t want to invest in them. If you have more than 5% of your portfolio in any one security, or 15% in any one sector (industrial, geographical, social, political, etc.), make some changes.

Since 401(k) plans are almost exclusively mutual fund/ETF shopping malls, it is difficult to assess the income component of risk minimization. Product descriptions should provide the answers. You can stay away from products that don’t produce income, but the easiest way to benefit from a fund portfolio is to establish selling targets for each of them.

If your Blind Faith Fund Unit Value rises 10%, sell all or part of it and move the proceeds to another opportunity that is down 20%. Profit taking is the ultimate risk minimizer.

So long as we are in an environment where retirement plan income (and principal in the case of all private plans) is subject to income taxation, 401(k) participants would be wise to establish an after tax income portfolio invested in tax exempt securities— or to vote more selfishly.