401(k) plans: from good to great

The picture above is the cover of Jim Collins’ bestseller, Good To Great. The book, says Mr. Collins, shows that

Greatness is not primarily a function of circumstance; but largely a matter of conscious choice and discipline.

He’s talking about corporate management, of course. But why not think about 401(k) plans in those same terms. How do we go from good 401(k) plans to great 401(k) plans?

That process is clearly underway. There are folks out there leading the charge. They include our friends and fellow bloggers Brightscope, a firm which quantitatively rates 401k plans, and Josh Itzoe. Josh is both a CFP® and AIF® and is a Principal of Greenspring Wealth Management, Inc., a registered investment advisory firm and Independent Fiduciary in Towson, MD. I reviewed Josh’s book Fixing The 401(k) earlier this year. 

There’s also Roger Wohlner, CFP®, whose local, and in his blog, Chicago Financial Planner, writes about the characteristics of a good 401(k) plan. Those ingredients, he says, are:

  • An active and engaged Investment Committee is essential.
  • An investment process governing the management of the plan.
  • A menu of solid, well diversified investment options is offered.

What can take a 401(k) plan from good to great is Roger’s conclusion:

In the future hopefully plans will offer their participants the option of having an unbiased, unconflicted Fiduciary Advisor manage their individual 401(k) accounts. This goes far beyond the education currently offered by some plans and, in my opinion, gets to the real heart of what participants need.

And why? Participants in 401(k) plans just haven’t been achieving an appropriate rate of return. No great insight on my part, but just take a look at recent research to see how really bad it’s been.

For the past 15 years, Dalbar, a Boston-based financial research firm, has been issuing a report called the Quantitative Analysis of Investor Behavior (QAIB) that examines the returns that investors actually realize and the behaviors that produce those returns.

In its 15th annual study, Dalbar discovered that equity, fixed income and asset allocation mutual fund investors experienced average annual losses for all time periods examined except the longest (20-year) time frame. And even those positive returns did not keep pace with the average inflation rate.

I’ll leave the commentary and analysis of the report’s results to the investment experts like Josh and Roger, but one stat jumped out at me. While the S & P 500 earned an average return of 8.41% from 1988 to 2008, the average equity investor earned a mere 1.87%.

Some investment experts call that 6.54% differential the cost of uninformed investing, and others call it the cost of going it alone. I call it the cost of inadequate retirement income.

There’s no guarantee that independent investment advice is the answer. To quote the ubiquitous compliance officer: “Past performance is no guarantee of future investment results.”

But then again, investment education programs haven’t worked. 

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