401ks: You better not judge this book by its cover


We all should know by now that defined contribution plans such as 401 (k) plans have taken the place of traditional, defined benefit pension plans in Corporate America. What many people fail to understand, however, is how the investments held in these accounts can be dangerous to their future retirement. Let me discuss two problems to consider.

  First, most 401(k) plan administrators (the folks who manage the plan) are investment firms, many of whom have their own proprietary mutual funds. So, it shouldn’t be surprising that the fund choices offered to plan participants include these funds and, in some cases, are the only fund choices offered. Fidelity is a huge 401(k) plan administrator and, in every Fidelity plan I’ve seen, their funds are in the majority of the fund choices offered or are the only funds offered.  That would be fine if every Fidelity fund was the best performer when compared with other similar funds, but that is often not the case. 

One of the reasons why plan sponsors (employers) pick Fidelity is because their administrative fees — paid by the employer — are so low. If the investment selections they provide to you, the plan participant, are not broad enough to give you the latitude to select better choices, however, then you are potentially harmed from a return-over-time perspective. Fidelity isn’t the only firm doing this.  

Franklin Templeton, another large mutual fund firm, was recently ordered to pay restitution to their current and former employees for mismanaging their employee 401(k) plan by limiting investment choices principally to Franklin Templeton funds as well as charging excessive fees for such funds. Taking advantage of their own employees!

  A second area of concern is the infamous target date retirement fund option found in many 401(k) plans. These funds are typically created and managed by the plan administrator (investment firm) and offered either as an alternative or, in some cases, as the only choices in the plan. As before, there are two concerns here. One is that these target date funds are often packed with proprietary mutual funds of the plan administrator, which may or may not be the best performers in their class of funds. Another concern is investment fees — who keeps an eye on the fund fees subtracted from participant account balances? Since the employer is not paying these mutual fund fees, they have little incentive to police them and they are not disclosed on any participant account statements, so the individual participant rarely knows the fees he/she are paying.

  To be clear, I am not suggesting that you avoid participating in your employer’s plan, just do so wisely. Make whatever contribution is needed to receive the full employer match — failing to do that is passing up free money. Next, consider funding a traditional or Roth IRA, assuming your income does not exceed the limits for such plans. Third, consider funding an after-tax investment account; you will pay the tax now, but the money comes to you in the future income tax free. Fourth, consider funding an indexed life insurance plan. Assuming proper and regular attention by a life insurance professional, these plans allow you to accumulate substantial amounts on a tax-deferred basis and, depending on how you withdraw the accumulations, could produce a tax-free income in retirement and a tax-free death benefit to the ones you love the most. Speak with a Certified Financial Fiduciary (CFF) about your individual circumstances and goals. A CFF has a legal, moral and ethical obligation to always act in your best interest.

Frederic “Ric” Schilling is a Florida native, born in Jacksonville, Fl. Ric is President and founder of Senior Guardians of America, a local North Florida firm specializing in tax reduction, long term illness planning, asset protection, probate avoidance and life income planning. Ric is a National Speaker and Advocate on Senior Issues and has been featured by the Florida Times Union and WJXT, TV-4 in Jacksonville as an authority on Estate Planning and Retirement Issues. Senior Guardians has an A+ rating with the Better Business Bureau and is a member in excellent standing with the National Ethics Association. Ric Schilling is a Certified Financial Fiduciary (CFF). You may contact Ric at 904-371-3302 or 888-891-3381      Please visit: www.seniorguardian.com

This article is not intended to give tax or legal advice. Securities offered through Center Street Securities, Inc. (CSS), a registered  Broker-Dealer & member FINRA & SIPC. Investment Advisory Services offered through Center Street Advisors, Inc. (CSA), a SEC Registered Investment Advisor. Schilling and Associates (d/b/a Senior Guardians of America) and CSA are independent of CSS.


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