by Chad Brown, Founder

There is a fundamental flaw in the way that most Americans prepare for retirement.  If you're like most people, the largest component of your retirement savings, by far, is your employer's 401(k), 403(b) or 457 plan.  I'm going to make a bold statement and I want you to listen:

I believe 401(k) plans are fundamentally broken. 

Let me explain.  Prior to 401(k)'s, how did most people prepare for retirement?  They had pension plans, right?  Well, in the 1970's a lot of companies were shutting down their pensions - they just didn't want the liability associated with them any more.  So the government came in and said that they needed to fix this problem.  The problem they had is that they wanted a tool for employees to save for retirement but this idea had two flaws:

1. 401(k) plans are focused almost exclusively on the Accumulation Phase of retirement and don't incorporate the actuarial science that allowed pension plans to create relatively high streams of income in the Distribution Phase of retirement.
2. (And this goes back to the Law of Unintended Consequences) They created this tax-deferred vehicle for people to save but they did not strive to give them the knowledge.  How many classes did you have in portfolio management in high school and college?  And yet you're expected to effectively manage investments in the real world (for your own future, no less), right?  And, in my opinion, that's the problem.  We've forced many working American to be a money manager, but we haven't adequately prepared them!  Think about it.
   

In fact, 68% of workers say they don't know as much as they should about retirement investing.¹  And, does your employer, or even the plan representative, give you any advice about how you should invest?  As someone who's been in this industry for decades I can assure you that most employer-sponsored plans may not give investment advice because, again, they don't want the liability.

So, what inevitably happens?  Many plan participants take the easy path and just select a target date fund.  The problem is that target date funds cannot incorporate all the relevant personal facts that determine the ideal allocation for your retirement investments.  You can find yourself either forfeiting needed growth or accepting unnecessary exposure in an increasingly volatile market.  Or, some build a portfolio among the 15-20 funds offered in their plan by "chasing returns" of the best performers in prior years - a common but major cognitive error that most often leads to poor results.

Now consider this:  according to Dalbar's 29th annual Quantitative Analysis of Investor Behavior Study, the average DIY investor's returns trailed the broader market's returns by around 3-5% annually over a 30-year period.²  But in contrast to that, studies in the last decade or so have shown that people who sought help from a qualified financial advisor - one who does have education and training in money management - could earn around 3-5% more per year (even after the fees they paid for that advice) than just going it alone.³  But the reason for that difference is not just because advisors are better at selecting investments.  Do I have your attention yet?  Read on...