As stewards of their clients' financial security, investment advisers and planners must keep a vigilant eye on companies altering their 401(k) plans in ways that hamper clients' ability to save for retirement properly.
Yes, there are plenty of federal regulations in place to protect the safety and soundness of employer-sponsored retirement accounts. That said, companies have a lot of latitude when it comes to changing plans in their favor. A perfect example of this came to light this month with AOL Inc.'s attempt to replace its paycheck-by-paycheck contribution match with an annual lump-sum match.
Such a change would have meant that employees who left the company before the match date would have forfeited hundreds, if not thousands, of dollars in additional savings. For younger employees, those losses would have grown exponentially — thanks, of course, to the power of compounding. Then there's also the loss of dollar-cost averaging.
Fortunately, AOL reversed its decision when its chief executive, Tim Armstrong, garnered lots of bad press for implying that the change in policy was due in part to a couple of employees whose infants required expensive health care. Nevertheless, the incident highlights how vulnerable clients in employer-sponsored retirement plans are to the whims of company executives, who often focus more on the bottom line than on employees' financial well-being.
In watching over their clients' 401(k) plans, advisers should keep a close eye on fees and expenses.
High fees have a profound effect on clients' retirement accounts. A 30-year-old employee with a 401(k) balance of $25,000 would see the value of that account grow to $227,000 by the time he or she is 65, assuming a 7% annualized return and fees of 0.5%. With fees and expenses of 1.5%, however, the value of that account would be just $163,000.
That's a lot of bingo money left on the table.
Advisers should also sound the alarm on 401(k) plans that offer participants lousy, or inadequate, investment choices or have onerous waiting periods before new employees are eligible for a match or other company contributions.
Advisers who spot conditions that may impinge upon their clients' retirement readiness should encourage those clients to register their protest against such policies. Better yet, advisers might even consider registering their own protest on behalf of their clients.
As employers continue to move away from traditional pension plans, replacing them with 401(k) plans that shift the burden of saving for retirement to employees, an adviser's role as guardian of their clients' retirement hopes and dreams is ever more important.
Unfortunately, the vast majority of Americans are clueless when it comes to how their 401(k) plans operate. If there was ever an opportunity for advisers to step up and advocate on behalf of their clients, it's in how their retirement plans are run.