Why can’t the Cylons run my 401K?Aaron Pressman
There’s a bevy of news headlines enticing me to blog today – another homebuilder stumbles, retail sales in January got a big boost from gift cards as some had predicted, the whole Blackrock-Merrill Lynch tie up (I last wrote about Blackrock back in ) and so on. But two things really caught my attention: the Wall Street Journal’s on 401ks at companies that go bust and Charles Schwab’s that it won a stock picking contest against other Wall Street firms. How can I possibly tie these together with a reference thrown in to boot? Check after the jump and find out…and I will NOT be posting any pictures of Katee Sackhoff or Grace Park to entice you.
In one way, our national transition from traditional pension plans to 401K plans has been a boon for younger and more mobile workers like myself. Under the old system, if you left a company after a few years, bye-bye pension. I have had what seems like 20 jobs in the past 17 years and so, in the old system, I’d be looking at 40 with nothing saved for retirement. But because 401ks are portable, I’ve got an okay little nest egg.
The Journal today reports on the travails of people who left money invested in the 401K program of an employer after they moved on and then the company went under. The firms that administer the plans won’t lift a finger without forms signed and authorized by the old employer so it can be really tough to extract the dough if there’s no HR department left. In my experience even when there is an HR department, they sometimes don’t do much to help. I had one company tell me that since a year had passed and I hadn’t moved my money they weren’t going to let me roll it over. Eventually they relented, but I learned to use the first opportunity to roll over to my own IRA when I change jobs ASAP. It’s a little odd that the Journal piece doesn’t give this basic piece of advice. Unless there are incredible investment options not otherwise available, I’d much rather move savings to a brokerage IRA that can invest in anything.
And that is the downside of the move to 401ks. A pension fund is managed by professional, full-time managers to meet the collective financial needs of a large pool of people. Pension funds have access to all manner of investments including venture capital, private equity and hedge funds. Overall, fees are much lower than on the average mutual fund. By contrast, 401Ks have very limited investment options, especially in the fixed income and alternative classes. An obvious limitation is cost – thousands of pension fund participants effectively pool their resources to pay for the cost of the managers.
A lower cost way to manage 401k retirement money might be using a computer-based system. I’ve been skeptical but now comes word that Schwab’s quantitative stock rating system has outperformed the ratings of all the other firms on Wall Street over the past three and five years. So much for deep fundamental analysis. Maybe all I need is a robotic Cylon watching my 401k, automatically moving me in and out of investments based on quantitative and historical measures. While I’m at it, the Cylon could do my wife’s, sister’s and parents’ plans too. That would be a load off my mind. So say we all…