The Trouble With 401k Plans

Let’s face it, it is a reality that we have problems with 401k plans. People are blaming the fact that the money is being invested in stocks rather than more stable bonds. This is however not the case, since over the long term, shares will outperform bonds by a wide margin. The reality however is that it’s the employers who are to blame for inaffective retirement plans, since they are not matching the employee’s contribution as they should.

With the present volatile market conditions and share prices on the floor, it seems that huge amounts of money have been knocked off the retirement plan values. The issue is not the volatility, since these plans are long term investments. The problem lies with the brokers, who do not wisely advise their clients not to panic when the market value falls. They are not selling properly, and explaining all the relevant details to their clients. This flaw is leading people to panic, and withdrawing funds from their plans at the worst moment they could possibly do so.

The same had happened in Ocotber of 1987, which is one of the biggest one day collapses recorded in history. Millions of depositors had lost out when two years later the S&P 500 had rose by over 30% .

Furthermore during congress in October, it was recommended that 401k plan managers invest funds in bonds rather than shares. Well thank God this didn’t happen, since by the end of October, the Dow Jones has increased in value by at least 10%.

Things are different in the Austalian continent, where retirees are required to contribute 9% of their salary into their pension plan, and so they stand now with more than enough funds in their portfolio. In the United States, the contribution is on of the lowest in the whole world, as it stands at a mere 3%. So finally the gist of all this is; the 401k plans should be reviewed and fixed, in a way that will benefit both employers and employees.

Reference: http://www.401khelpcenter.com/401k/white_401k_aarp.html