Over the past thirty years 401(k)'s have dominated the employer retirement plan market, and today over 90% of private employers offer them...
The benefits of these plans can be substantial, but unfortunately several studies released over the past few years illustrate a problem of national importance.
According to the most recent stats:
70% of the participants between 55 to 65 years of age have less than 20% in stocks, or more than 80%.
Among 25 to 35 year olds, almost a third have 80% or more in cash!
And across all age groups less than 10% of the funds are invested in bonds.
What these figures clearly show is that a large percentage of the participants are failing miserably at managing their money. The problem is one of investment extremes; far too many people are too conservative, or too aggressive.
Investment extremes are a common topic at Leahy Wealth Management Group. The sad reality is that extremes in investment allocation are an investment psychology / behavioral issue that most people are not able to easily resolve on their own.
What may surprise many readers is that far more people suffer from the propensity of being too conservative, rather than too aggressive. In a blog post from January 2014, titled the Pillars of Wealth Destruction, investment extremes and negligent investing are discussed in detail.
The past 14 years have been plagued by above average economic and market uncertainty, but it appears too many young investors, and pre-retirees have overreacted to the higher risk environment. As an investment professional to see stats where young people (in their 20's and 30's) have over 80% in cash is heartbreaking, and soon to be retirees with less than 20% in stock, or over 80% is equally disturbing.
How to fix the big problem with 401(k)'s? People need to send their personal advisors their 401(k) allocation statement, and ask for advice. If they don't have an adviser then at the very least they should consider the target date funds within their 401(k) plan, and select the fund that is age appropriate for their retirement. If there are no target dates to choose from then they should contact the plan administrator for assistance, or hire an adviser that charges by the hour.
An unrelated topic to the investment problem in 401(k)'s is the problem with beneficiary designations. This is a commonly neglected area - please make sure your beneficiary designations are correct. It's important to note that beneficiary designations supersede a Will and other estate planning documents. It's a common problem for people to leave ex-spouses, or siblings as their beneficiary, even though their situation may have changed dramatically. And courts do not waive the rights of the named beneficiary, even though it may have been an obvious oversight of the deceased.
