People with 401(k) plans have been sold a great investment tale. This tale includes long-term growth, investment diversification and a source of retirement income that will keep 401(k) owners smiling just like the happy people in the marketing brochure. The only thing people need to do is sock away as much money as humanly possible into their 401(k) plan, and great riches will follow. But is it true?
The Diversification Farce
Most 401(k) plans purport to offer a diversified menu of investment choices that complies with the U.S. government’s Employee Retirement Income Security Act.
Some of these 401(k) investment choices may include U.S. stocks, small-cap stocks, international stocks, emerging markets, bonds, money market and probably even a few target dated retirement funds. The claim is made that a portfolio of stocks, bonds and cash offers adequate diversification.
But missing from your 401(k) mix are other notable asset classes like gold (NYSE:GLD), silver (NYSE:SLV), precious metals (NYSE:GLTR), commodities (NYSE:GSG) and global real estate (NYSE:RWO). How can a 401(k) menu make the false claim that it’s “diversified” if it lacks coverage to all major asset classes — not just stocks, bonds and cash?
Regardless of these petty atrocities, ERISA’s distorted “diversification” standard is good enough. So long as 401(k) providers comply with ERISA, they can make the technical claim they offer a “diversified” investment menu to 401(k) participants.
Why Does it Matter?
An estimated 72 million people have 401(k) plans or something similar with an aggregated sum of $3 trillion, according to the U.S. Department of Labor. Now more than ever, 401(k) investors need to have a complete set of investment choices to combat instability in government and the global economy. And a straight portfolio of stocks, bonds and cash won’t cut it.
The only product structures that accommodate asset classes like physical bullion and commodities are exchange-traded funds. But since the 401(k) industry has a bias against ETFs in favor of mutual funds, they refuse to give their 401(k) customers a complete investment solution. Instead, they favor the status quo.
A recent study by the U.S. Government Accountability Office proves this. It showed how the 401(k) and mutual fund industry has spent much of its efforts — not on issues to improve 401(k) plans, but on fee splits with business partners, marketing and defending their bureaucracy.
A GAO study revealed that revenue sharing, whereby a mutual fund company shares its fee income with the 401(k) plan’s administrator, is a common practice. The actual compensation can range from 0.05% to 1.25%. Why is it a problem? Because it creates a hidden incentive for the 401(k) service provider to recommend investment choices with higher fees, some of which may even include funds with substandard performance.
In this slimy environment, how could a precious metals ETF that offers no hidden B-52 fees or other subversive fee payments ever make it onto a 401(k) menu?
It’s Retirement Income, Stupid
Does anybody remember the main purpose of a 401(k) plan in the first place? It’s not to grow your money, nor is it to provide you with a rich tax deduction as you’ve been told. Rather, the purpose of a 401(k) plan is to provide you with an adequate source of retirement income so that when you’re grandma’s age, you don’t have to eat Alpo for dinner.
Yet, what’s the first thing most 401(k) account holders do when they receive their quarterly statements? Anyone that answered “they immediately look at their total account balance” is absolutely right. What else is there to do? Isn’t the total 401(k) balance the bottom line? Yes it is, but it’s only part of the story.
A recent report from Reish & Reicher titled “401(k) Account Balances as Monthly Retirement Income” hinted at future changes in how 401(k) plans operate.
401(k) statements originally were designed to show how much accumulated retirement assets a person gathered. While that’s good, it’s only part of the equation. For that reason, 401(k) statements of the future will need to show how much monthly or annual income that the person’s 401(k) sum is capable of generating. Ultimately, this is the bottom line reason for a 401(k) plan — to have the accumulated sum generate an adequate level of income that 1) covers a person’s expenses and 2) doesn’t prematurely run out.
What does any of this income talk have to do with commodities, precious metals and my 401(k) plan? To achieve an adequate 401(k) lump sum and thereafter an adequate income source, a person needs to have a multidimensional approach that involves low-cost market exposure to all the major asset classes — not just the ones favored by mutual fund salespeople.
For the record, I am neither a gold bug nor a proponent of an all-bullion investment portfolio — nor do I have to be — because what’s being argued is an issue of plain common sense.
The fact is 72 million people with 401(k) plans face acute financial risk because of substandard investment menus that appease ERISA’s false definition of “diversification” and the status quo. And the only way to help 401(k) investors is for ETFs and other investment vehicles to be offered inside 401(k) plans. The ETF(k) retirement plan, as I call it, is the retirement plan solution of the future.