MyPlanIQ recently ran an interesting article in their weekly newsletter regarding the Occupy Wall Street movement and the overwhelming wealth disparity in the world. What we liked about this article was the actionable advice towards the end that 401(k) plan participants can take to retain control over building their own wealth—without having to march on Wall Street.
The demand of ‘Occupy Wall Street’ protesters reveals a stark reality in the U.S. and the world: The greatest income inequality between the top 1% and the rest of us. The world is in an era unseen since World War II: An uneven and unstable economic period that could spur political and social unrest.
In investing, the great divide also exists: 99% of plan participants got lower or even zero returns in the past decade, while the other 1% (hedge funds and other wealth management programs catering to wealthy individuals and institutions) have achieved double-digit returns.
In fact, from a report by the Department of Labor, EBSA estimates that from 1998 to 2007, the average annual returns for IRAs were 4.5 percent, compared with 5.4 percent for 401(k)s. In the same period, Vanguard balance fund index (VBINX) rose 6.5%% annually, while S&P 500 (Vanguard 500 VFINX) rose 5.84% annually. On the other hand, hedge funds notched 8.7% average annual return (see EDHC report).
Some of the main issues why the rest of us achieved lower returns (and were exposed to bigger risk) are:
High Fees: The never ending issuance of new fund issuance, insurance products that charge high fees with convoluted disclosures in small print, various mutual fund classes and the fees charged to many uninformed 401(k) plan participants. Professors Edwin J. Elton, Martin J. Gruber and Christopher R. Blake at the New York University reported “We find that the index funds chosen by 401(k) plan administrators are on average inferior to the S&P 500 index funds selected by the aggregate of all investors.” (see The Adequacy of Investment Choices Offered By 401(k) Plans.)
Ill-Structured 401(k) Design and Low-Quality Fund Choices: We recently studied the Ameriprise 401K (see Ameriprise Employees Filed A Suit Over Expensive 401K Plan Fund Choices) and found that the plan has 19% (out of 100%) rating by MyPlanIQ. It has only 3 asset class coverage (as do many other 401(k) plans) and very low quality funds (ranked 4% out of 100%).
Buy and Hold Strategies Lead Investors and Retirement Participants Blindly: We are not against a buy and hold strategy. In fact, we always advocate that strategic asset allocation should have a place in one’s portfolio. But simply treating this as a dogma and doing nothing to rebalance your holdings periodically, while letting other high frequency traders, market makers, hedge funds and long short funds take advantage of the mass is somewhat shocking.
Certainly, while blaming others can be one way to vent one’s anger, it is more constructive to take an active role to solve the problem. That’s why we offer the following suggestions:
Talk to your human resource personnel: Show them how the plan is stacked up against others and why and how the plan can be improved (in three areas: lower fees, better fund quality and better diversification coverage).
Equip yourself with knowledge: First get your own investment portfolios in order based on asset allocation (diversification) principles, and then consider to enhancing your investment strategy by using various low cost services.
Stay connected with other fellow 99%: The internet now enables us to exchange information in a fast and efficient way. Ask questions and help out others.
Disclosure: The views and opinions expressed here are those of the author(s) and do not necessarily reflect the views of the Portfolioist.
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