October 2004

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October 2004
STATE OF THE 401(k) ADVICE INDUSTRY
or
Three Retirees Walk into Wal-Mart, and the first
one asks..
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Will I have enough money in my retirement?
The second retiree asks, How should I invest my
money right now?
The last retiree completes the list of the three
biggest questions retired or about-to-be retired
investors have. That is, What do you do when
the stock markets change like they have so often
over the last few years?
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• Many times a picture answers a question better
  than anyones expert opinion. When you look at
  the chart on the next page, remember how
  important the SP 500 performance is to world or
  stock market
• investing.
• SP 500 stocks control over 75 of all stock
  market
• capitalization.
• SP 500 stocks control over 75 of all equity
  mutual
• fund assets.
• SP 500 stocks control over 65 of all the Large
  Cap mutual funds that dominate 401(k) plans.
• Through the end of 2003, the average equity
  mutual
• fund has an 87 correlation to the performance
  of the
• SP 500 Index.

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So a buy-and-hold stock portfolio---fully
invested, every stock market trading day, from
January 2000 to the end of September 2004---lost
over 27 in just short of five years. If that is
not scary enough, look at the arithmetic involved
in getting your money back. 27 divided by
(100-27) 36.98 percent. So when you lose 27
of your money, you need a return of almost 37
just to get your investment back. That is a
little scary for a soon-to-be-retired investor.
This investor does not have the time remaining in
his or her career to make those losses up. Those
numbers are down-right frightening to an already
retired investor. You need your money now, and
you and your previous employer are not making any
more contributions!
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• The main point I want to make in this
  presentation, is the poor quality of
• retirement plan advice alternatives currently
  available to retirees or pre-
• retirees. Here is what a 401(k) plan participant
  has had to choose from for
• the professional help he or she needs to protect
  and grow retirement plan
• dollars.
• Investment education provided by retirement plan
  employer. If you can
• describe a year-old mutual fund prospectus and
  marketing brochure
• handed out at the annual Retirement Plan
  Enrollment Meeting as
• investment education.
• On-line 401(k) plan investment advice. The
  experts really thought that
• this product would work a few years ago. Using
  on-line software to tell
• a retirement plan participant how close they
  were to their retirement
• goals. No information on the most important
  question of, what do I
• invest my retirement plan money in? Just
  information on how close
• you are to your retirement goal.

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• The availability of Lifestyle mutual fund
  options in the retirement plan menu. This is my
  favorite band-aid solutions to help retirement
  plan participants. The retirement plan sponsor
  acknowledgement that retirement plan participants
  are so ignorant of investment basics, the
  retirement plan sponsor has to offer mutual funds
  that place your retirement plan money on
  auto-pilot. That is, you just pick the date
  you will retire, and match it with a mutual fund
  option in your retirement plan with that same
  date. You place all your money in that mutual
  fund, along with future contributions, and you
  will be able to retirement with no problem.
  Right. Your retirement condominium will be
  located in the same building as The Tooth Fairy.
  In fact, you will be on the same floor as The
  Easter Bunny.
• Professionally Managed Accounts available in
  401(k) plans. These accounts are offered by the
  same money managers that invest your retirement
  plan mutual funds. In each calendar year, less
  than 15 of these mutual fund managers
  out-perform the SP 500. And these money
  managers are not the ones available in your
  401(k) mutual fund menu. See the previous chart
  on the performance of the SP 500 over the last
  four years for the remainder of this answer.

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None of these retirement plan offerings will
work, or were everdesigned to work because they
dont provide a retirement plan participant with
the information necessary to make informed
decisions on how much risk he or she wants to
take with his or her retirement plan money. Any
stock market investor can make an informed
decision if he or she gets the right information.
But as the above examples suggest, there is no
current delivery system available to a retirement
plan participant to get him or her the right
information. Retirement plans are set up to
benefit the company sponsor---the retirement plan
is as low-cost as possible and as free as
possible from any future liability on the part of
the company. In addition, retirement plans are
set up to benefit the retirement plan provider.
That provider has a captive audience of employees
funding their retirement plans every month with
as much money as possible to ensure a safe and
secure retirement. The retirement plan
sponsor gets paid on the accumulation of these
dollars every year. Performance is not
important---only the added dollars from plan
participants.
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• The only option that will ever work, for current
  retirement plan participants, retirees, and
  about-to-be-retired investors, Is to
• work with and advisor who understands stock
  market risk.
• An advisor has to help you understand these basic
  stock market
• risk-management questions
• Is the current stock market configured to make
  you money or to
• take money away from you?
• Where is the current out-performance in the stock
  market? Large,
• Mid, or Small Cap? Value or Growth investments?
  
• What is your plan if things go wrong? What is
  your stop loss point
• for the different parts of your stock market
  portfolio?

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