About half of the American workforce participates in an employer-sponsored retirement account. One of the most used is the 401(k), but there also is a 403(b) and a simple IRA, among many others, according to the Bureau of Labor Statistics.
Most employers are not retirement specialists. They want to focus on what they do best, which usually isn’t evaluating retirement plan options.
To make life and business easier, employers usually pick retirement options that are simple. This drive to simplicity can often lead to reducing options in the retirement plan.
This isn’t always a sign that employers are heartless or uncaring of their employees, they just get overwhelmed with the process. This is especially true of smaller employers who don’t have the time or resources to offer fantastic retirement benefits.
But it is essential to know the common faults of employer-sponsored retirement plans. It may help you in your decision to pick employers and will also assist in the choice of whether to roll over these types of accounts after youn leave an employer.
Perhaps the most significant defect of employer retirement plans is poor investment selection. Tom and I see a lot of retirement plan statements that contain a list of available investment options. More often than not, these investment options are below average.
Although there are thousands of investment options, many retirement plans limit investors to a few dozen mutual funds. Of those few dozen funds, many are subpar with a few good funds sprinkled in. These poor options significantly reduce the employee’s ability to prepare for retirement.
Another common problem we see with employer plans is substantial fees. Many mutual funds can be expensive, and we often see costly funds inside these retirement plans.
The worst part is that some retirement plans have hidden internal fees that are not explicitly revealed.
Employer plan sponsors usually don’t offer good planning options. This means that when it comes to risk management and financial planning, the investor gets little to nothing. Many employees jokingly called their 401(k)s 201(k)s during the credit crisis. It is rare to receive any kind of risk management from a 401(k) provider.
Many 401(k) providers are turning to technology and call centers to provide planning services.
This is risky. Financial technology is often too generic to serve all the nuances of real people with real questions and problems.
I have looked far and wide for software that can accomplish advanced planning, answer difficult questions and pull together all the various worlds of personal finance, there are no good options.
The listed reasons are why many advisers recommend rolling over employer-sponsored plans into IRA rollovers. It is important to note; however, that not all advisers offer better options.
Rollovers should not be done blindly. If the reasons I listed above are not factors then you may be served well by staying where you are.
This would be rare, but it can happen from time to time.