Monday, January 23, 2012

401K Trends to Watch in 2012

Any followers of this blog know that I typically focus on individual stock research. My goal for 2012 is to spend some more time focusing more on trends in investments and especially more time on retirement options.

Interesting article yesterday from the Associated Press regarding trends in 401K plans. Mostly positive trends, but generally basic themes that are incredible that they weren't automatic from the beginning. Disclosing fees wasn't a requirement from day 1? Finally moving towards advice is another better late than never concept.

My number 1 frustration remains that the focus is on fees and not performance. Why not focus more on net return and less on fees? I'd rather pay 2% for a fund that makes 20% than 1% for a fund returning 10%. Sure I'd rather get 21% from the first fund with it charging only 1%. Still competition ultimately reduces fees, but net performance should be the focus.

Read the article for more details on the trends. Below are the 9 trends with my view on each:


1. Higher contribution limits

Good to see the limits increase with time. Most investors don't contribute anything close to this amount so it shouldn't be much of an issue. 

2. Improved fee disclosure
Amazing that it still doesn't require all fees to be disclosed. Absurd that investors won't know all the charges even after the new rules go into place. 

 3. Declining fees
As I mentioned above, lower fees are better if investors are getting the same quality. Net returns remain the key.

4. More ways to get advice

Oh brother, unbiased computer model? Ok, these computer models are good for modeling how much you need at retirement and how much to contribute. Novice investors still need advice that gets them in the correct investments for them. 401K providers should really ramp up advice for employees with say $100K+ in assets. 

Maybe as an investment advisor I'm just seeing potential clients.

5. More companies restoring 401(k) matches
Doesn't this seem ironic that corporate profits are at record levels and companies are just now restoring matching contributions. Would've thought just about all companies that suspended matches would've restored them by now and not only 75%. 


My other thought is that this will be more money into the stock market.

6. Larger number of ETFs and index-fund selections
  
As a stock picker I'm naturally against these, but some make sense for retirement accounts where the more important issue is for investors to contribute $$$ and returns are secondary. Also, the lack of advice in 401K plans makes basic investments sometimes better. Not to mention that most plans lack investment options so anything new would help.


7. Automatic features will rise
This just speaks to the sad state of the general public. The fact that auto enrollment boosted participation from 63% to 95% is incredible. Those 28% were just too lazy to sign up? The more incredible part that this report doesn't list was the amount of investors that left match money on the table. Free money and people were turning it down.

8. Options for generating income will grow
Ummm... not much details here, but the annuity concept concerns me.

9. Number of multiple employer plans will climb   
Great way for employers to save money though highlights why the system is so inefficient. Why not have the employers just contribute the money directly to employee directed IRAs at a custodian like Vanguard or Fidelity. Makes no sense that I get more control over my 401K plan after leaving a company than while employed. 

  
So the 401K concept is getting better, but it still has too many restrictions. More advice and less fees are great, but still too little. Investors should have the money contributed to an IRA where the employees could get an RIA to help manage the money. This way it would be outside the employers control which further reduces the reasons for so many restrictions. My old 401Ks always had too few options. 

Change is always too slow!

 

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