There are any number of problems with retirement plans in America. Many of them are well known and many are yet to be discovered.

If only we would stop throwing our money away.  

If only we would stop throwing our money away.  

The Department of Labor just took a big step to expose one of the primary problems. They're requiring that your 401k provider tell you exactly how much it costs for you to own the investments you have in your plan. Truth be told, you won't get the real number, but you'll get close. The number that you get typically needs to have about another 1.4% or so added to it. You see, most retirement plans with any meaningful investment options are invested in what's known as "active" investments. That means that your mutual fund manager, or variable annuity sub-account manager buys and sells stocks and bonds in and out of her portfolio for you. But, like you, they too pay to trade securities and the more they trade the more they (it's you actually) pay.  We've referenced the matter of undisclosed trading costs in other blogs we've done.

So, if we use simple math, we can conclude that the average plan participant pays about 3% per year in expenses and trading costs to earn their rate of return. Question is; in an era where investment returns aren't expected to be all that great, can you afford to give up 3%? The better question might be, "can you ever afford to give up 3%? (A side note here; one might want to consider the following formula: Equity Risk Premium - 3% is how close to the yield on risk free treasury securities. For the record if the equity risk premium today is about 5% that nets to 2%)

As if the 3% give-away program (more properly known as your 401k plan) didn't have an expense challenge, it may have an even bigger challenge. Research has shown that as a group, people tend to make horrible investment decisions. Back in the late 1980's then popular Consumer Advocate, Jane Bryant Quinn noted in a magazine article that "giving employees investment options and expecting them to build a portfolio is about the same as giving them auto parts and expecting them to build their own car." True comment, real results.

In a recent NY Times article, Author Teresa Ghilarducci, (Our Ridiculous Approach To Retirement) got it just about right. The self-directed retirement system is a failure. She of course sites other reasons, most notably that you have to have an idea what retirement will cost in order to know how to fund it, but her specific reference to the failed bias towards "active" management is pretty clear right there in paragraph three. 

What does this all add up to, other than the estimated 3% charitable bequest to your service provider?

One: if you can't make sound investment decisions don't. Get some help; the one thing that you do when you're in a rut is to stop digging, and;

Two: Tell your employer to get help too, they've been getting by for too long with slacking on fiduciary obligations and responsibilities.

If the DOL wrote a rule, be sure that they'll be out to make an example of somebody and they aren't going to go after United Airlines or Microsoft.