I recently came across a rather glib press release trumpeting the 25th anniversary of the 401(k) plan. It noted that 47 million Americans now actively participate in 401(k) plans, compared to the 21 million who now participate in traditional defined benefit plans. Essentially, we are well on our way to a wholesale shift of risk from large entities to the individual ... the magical ownership society. And *presto poof* we kill (or maim at least) three birds with one stone: 1) nettlesome pension deficits; 2) 1,000 points of ownership light blink on; and, 3) the financial middlemen enjoy an unprecedented boon.
Call me a skeptic, but I've met a lot of individual investors and financial advisors in my travels, and the level of knowledge, even among those who are paying any attention, is, well, appalling. In the 401(k) business, you end up with a potent cocktail of this investor cluelessness paired with a generally horror-show lineup of investment options in the plans. It adds up to an old joke I remember from when I was growing up in rural Ohio: "He may be small, but he sure is slow."
In a nutshell, the 401(k) plan, or something like it, could actually work, but what we have right now is a bloated and inefficient system that forces investors to pay more than they should for investment options that aren't what they ought to be. The way that mutual fund companies now cling to 401(k) plans as massive distribution machines locks investors to a limited choice of generally high-expense-ratio, high-fee plans, which put many investors in a situation where they might do better in a taxable account.
I recently saw Brian Reid, who is chief economist at the Investment Company Institute (ICI), speak at the Invest N Retire conference in Portland, where I was doing my usual banging of the index investing drums. Mr. Reid and the ICI are, of course, delighted with how the 401(k) market has developed, as their benefactors, the mutual fund industry, have never lived better, with now 54 million U.S. households invested in mutual funds at a median level of $48,000 a year and average annual expense ratios of over 1 percent for equities funds.
Mr. Reid said a few things that caused me to do a double take…and he had data on his PowerPoint presentation to back up what he was saying. Here's a sample: 1)The underinvesting problem of U.S. investors is wildly overstated. Americans are in far better stead than what scaremongers say in terms of what they've saved for retirement; and, 2) The so-called "personal debt" problem is anything but. Almost all debt is on the highest income scale and poor people have relatively little debt. Huh?