Being in Control of Your Retirement Plan Is a Bad Idea

It sounds great, to be in control of your retirement plan. To make the investments you want to make when you want to make them. To be in control of a plan that has the flexibility to meet your particular retirement needs.

And Americans now have more choice than they've ever had with their retirement plans. It was given to them by the massive shift in the private sector from traditional pensions to 401(k)-like plans. With traditional pension plans participants have no direct say over how plan assets are invested. With 401(k)-like plans, they have much more say.

That is an appeal proponents of Social Security privatization are also making. Privatization would mean investment freedom. Instead of assets being invested in low yield treasury bonds, as they are now, participants could choose among Wall Street's myriad products to maximize their gains.

Having the freedom of choice sounds like a universal value that no person in her or his right mind would want to relinquish, especially when it comes to something so important for the future as a retirement plan.

But has that freedom of choice brought more retirement income or security? The answer is a resounding no. We are in a growing retirement crisis precisely because 401(k)-like plans which maximize individual choice have come nowhere close to matching the retirement incomes of the traditional pensions they replaced.

Few people have the inclination, time, or skill to ably manage their own retirement accounts. When it comes to investing, most participants in 401(k)-like plans are rank amateurs. Many attempt to compensate by engaging financial advisers, a growing cottage industry fueled by the 401(k) industry. But advice comes at a substantial price -- usually a percentage of assets -- that significantly compromises accumulations, and it is often given more in the interest of the adviser than the client.

The financial services industry answer to this undeniable reality is to preach the need for what it calls financial literacy to make every citizen able to navigate Wall Street's turbulent waters -- the educators of course to be drawn from the financial services industry for a price.

But even if that could be accomplished and would significantly help, which is doubtful, do we really want a nation of citizens for whom the highest goal of education is to be obsessed with making and tracking personal investment decisions?

Though you'd hardly know it from the bashing Social Security is receiving in the Republican debates, it is the country's most successful and popular retirement plan. A large part of its appeal is that it does not require participant choice over investment strategies. Participants can assume that the money is being professionally managed on their behalf.

The more choices that retirement plan participants have and exercise, the more manipulations the financial services industry must make -- and the more fees it can charge. Similarly, the more complicated and tailor-made or individualized the investment strategy, the more likely the participant will have to bear the cost of an investment adviser.

As Wall Street eyes warily efforts by the states to address the retirement crisis with public plans, you can be sure that its attitude is that if there must be public plans at all, the plans follow the 401(k) approach to maximize choice -- and the fees it can correspondingly collect.

For the vast majority of people, though, the best retirement plans are those that do not force them to choose among options that are not understandable, transparent, or predictable in terms of their consequences.

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