There's Hope For 401(k) Participants

It has been my long-held view that most 401(k) plans are a national disgrace.

Most 401(k) plans are flawed

Part of the problem is that the underlying concept behind how many 401(k) plans are administered is fatally flawed. They assume that employee plan participants are capable of managing their retirement assets, or even willing to do so. The issue is compounded by the fact that many plans maintain a dizzying array of investment options (often 20 funds or more). Plan participants with varying degrees of financial sophistication are then responsible for selecting the right combination of funds from among this host of choices to construct a globally diversified portfolio in an appropriate asset allocation. For many people, this is an impossible task.

It gets worse. Most plans are populated with actively managed funds (where the fund manager attempts to beat a designated benchmark). These funds have lower expected returns than comparable low-management-fee index funds. They are included as investment options because actively managed mutual fund families make "revenue sharing payments" to the gatekeepers of the plan, who provide access in exchange. Since index funds generally don't make these payments, they are often excluded.

It's not surprising that the question I get most often from readers of my books and articles is: "Can you review my 401(k) plan and help me put together a portfolio most similar to what you would otherwise recommend?"

Think about that for a moment. A properly constructed 401(k) plan would consist of portfolios built to achieve various risk levels (ranging from conservative to aggressive). These portfolios would include only passively managed funds, low-management-fee index funds or exchange-traded funds (ETFs). There would be no actively managed funds for either stocks or bonds.

While some plans are constructed in this evidence-based manner, most are not. The reality is that many participants don't have a say in whether or not their employer chooses a 401(k) plan that incorporates a range of managed portfolios overseen by fiduciary investment advisors, who are required by law to put the interests of plan participants first. Many employees don't get to decide if their plan will include only passively managed funds or low-management-fee index funds.

New entry

A relatively new player, (it's spelled with three o's), may provide an alternative for beleaguered plan participants without access to a fiduciary retirement plan advisor or a properly constructed, populated and managed 401(k) offering.

For a fee ($1 per month for accounts less than $20,000; $15 per month for accounts greater than $20,000), Blooom will analyze your fund options and make recommendations for the right asset allocation and appropriate diversification. It can also suggest funds that are the lowest-cost options in each asset class.

To sign up, users provide their name, date of birth and the login information to their 401(k) plan. According to Chris Costello, the company's co-founder and CEO, Blooom will rebalance your portfolio every 92 days to ensure your risk profile remains intact. Every two years, it recommends changes to make your portfolio more conservative as your retirement horizon nears.

It is important to note that Blooom is a relatively new service and, as yet, it remains untested over long periods and investment horizons. It is subject to the same uncertainty surrounding other robo-advisors and web-based platforms long term.

Ideally, all investors would be served by fiduciary retirement advisors offering managed portfolios and evidence-based investment options designed to help participants meet their retirement goals. The good news is that these advisors, and the 401(k) plans they offer, both exist and are gaining steam with many employers.

However, plan participants with small personal accounts sometimes have no access to responsible and intelligent advice (even though there are thousands of fiduciary advisors who are willing to, and already do, serve smaller 401(k) plans). Even investors with larger personal accounts may fall prey to "advice" given by brokers and insurance companies, who have no fiduciary obligation and may recommended expensive funds that benefit the broker or his firm at the expense of the participant.

In a perfect world, there would be no need for a service like Blooom's. In the world in which we live, it can be a valuable tool for some investors at a reasonable price.

2014-04-01-Hiresfrontbookcover.jpgDan Solin is a New York Times bestselling author of the Smartest series of books. His latest book is The Smartest Sales Book You'll Ever Read.

The views of the author are his alone and may not represent the views of his affiliated firms. Any data, information and content on this blog is for information purposes only and should not be construed as an offer of advisory services.