Just about everyone reading my blog has a 401(k), IRA, or some other kind of retirement account. If you don’t you’re likely aware of how they work and what their purpose is. Few people say these aren’t good tools. However not all retirement accounts are created equal. Some charge really high fees, limit your investment options, or just plain suck. For the most part even the crappiest of retirement accounts are worth the effort.
However the best plans have some additional features that most of us would really enjoy to have. In the future look to see if your plan starts offering these ideas or contact your plan representative and suggest it.
1) Automatic Re-balancing: It’s important to rebalance your portfolio. Some say you should do it every 6 months or year or some other interval. You do this to keep yourself from being overexposed in a specific asset class. For example, if you have 50% in stocks and 50% in bonds and the stock market does really well over a 6 month period you might find your portfolio now has 60% stocks. Wouldn’t it be great if every 6 months your investments just automatically rebalanced to an asset allocation you predetermined?
2) Automatic Enrollment:This is just for the employer sponsored plans. Statistics vary on how many people participate in employer plans but it’s always too few. When you’re hired, you should be forced to opt out of the retirement plans instead of opting in. If you ignore opting out the money could be placed in some kind of a bond fund to keep from exposing people to risk. This would come with an automatic company match as well.
3) Predefined Allocations: Investments are complicated to say the least. I prefer to manage my own portfolio but many people do not. Employees could select mutual fund “packages” that offer varying degrees of risk exposure. I’d suggest keeping it as simple as possible, and using plain English to describe the risks associate with each package.
4) Simple Rollovers: Again statistics escape me, but most of us will switch employers anywhere between 3 and 7 times over the course of our careers. That’s as many as 7 401(k) you have to roll over into an IRA. I don’t even want to know how many old 401(k)s are sitting around right now. Imagine if you could give your employer an IRA number and when your employment is terminated (either by choice or not) the account is drained and moved to the IRA. In the IRA the money is automatically invested in the allocations you’ve predefined.
There is a theme here if you haven’t noticed. Automation. Money is easiest to deal with when you don’t have to think about it. It’s why we love direct deposit so much. More people would invest for retirement if we simply made it easier for them to do it. We’re too used to pensions where the money is invested for us. To bridge the gap and ease us into picking our own investments we need to make things as simply and automated as possible.
If you’re thinking you’ll never see these sort of things in a retirement account I feel your cynicism. Employers don’t seem to gain anything by offering all these services. Or do they? Maybe you should ask IBM, who has spent millions creating one of the best benefits packages in the United States. We’re loyal to good benefits. And the independent companies that offer your IRAs will eventually offer more of these features because it’s the only way they can differentiate themselves from competitors. If you want to see how your 401(k) stacks up against other employers check BrightScope. It’s a new website and doesn’t have a lot of companies up, but they’re growing and the information is invaluable.
Photo: the rocketeer