Filed under: Saving
Defined contribution plans, such as 401(k)s, are the most popular employer-sponsored retirement plan in America, according to the Department of Labor's June 2013 Employee Benefits Security Administration report. We have seen significant changes within this field, such as required disclosure of fees and conflicts of interest, along with increased regulatory scrutiny by the Department of Labor and the Internal Revenue Service, which have benefited participants.
Innovations in the form of exchange-traded funds, along with participants' ability to invest in self-directed brokerage accounts from within the 401(k) platform, are opportunities that are beginning to shape the 401(k) landscape today. However, they will also present challenges to investors that they may be unfamiliar with. Let's take a look at the big opportunities within 401(k) plans and what you can do as an investor to take advantage of these opportunities when they become available.
1. Better service models. Employers gauge the success of their 401(k) plans by the number of participants within the plan and how much money their employees are saving. A large determinant to the amount employees save, however, is based on their education about the fund options and ability to invest with confidence. As a result, more plans are focusing on an "education plan" for participants to arm them with the knowledge to save enough money for retirement and feel confident in their investing decisions.
The driving force of this education effort is coming from investment advisers who can meet with participants on an individual basis to help establish a recommended savings amount, along with a portfolio based on risk tolerance. I expect that, as these services evolve, investment advisers will become better at offering full financial planning services to help guide outside investments as well as offering advice to include budgeting, college planning, insurance and estate planning services as well.
2. More investment flexibility. The days of only being able to invest in stock or bond mutual funds within a traditional 401(k) model are over. As participants become more responsible for investing for their retirement, they are demanding more flexibility and options to build their nest egg. The results have been encouraging, when you consider the progress that has been made within the small amount of time that has passed.
3. Roth 401(k). One of the best options available today for 401(k) participants is the ability to put retirement dollars into a Roth 401(k). The Roth 401(k) allows you the same tax benefits as a Roth IRA, but the contribution limits are the same as those within the traditional 401(k) model. Participants under age 50 can put away $17,500 in 2014, and those over 50 can put in an additional "catch-up" contribution of $5,500. Considering that Roth IRA limits are $5,500 in 2014 if you are under age 50, or $6,500 if you are over 50, this could be a huge benefit for retirement savers.
4. Self-directed brokerage accounts. Another great feature being added to 401(k) plans is the ability to invest within a self-directed brokerage account. These accounts are reserved for more savvy investors, or those who engage a financial adviser for investment counsel. However, they replace the limited number of investment options typically found within the 401(k) plan with the ability to invest in stocks, bonds, ETFs or mutual funds found on the retail brokerage side. Investing in this fashion places more responsibility on the employee, because they will have to develop an investment strategy on their own and monitor their investments more carefully. However, for those who are skilled or passionate enough to utilize this tool, it can allow them more flexibility to design their own portfolio.
5. ETFs. ETFs continue to evolve and develop to cater to many investor concerns and strategies. These investment vehicles offer many of the benefits of mutual funds, but trade like stocks and essentially bring the best of both worlds into one product. These innovations, coupled with the benefit of typically lower costs, have driven the demand for these products. Most plans are reluctant to offer these investments within 401(k) plans, for reasons ranging from the limits of index investing to revenue sharing, but I believe that as time passes, ETFs will capture more retirement savings dollars within 401(K) plans.
The common theme in 401(k) plan developments has been to empower participants with the tools and knowledge necessary to make strong investment decisions. The options listed above are just a handful of the features we are excited about moving forward, but we believe that as participants become more knowledgeable about retirement investing, they will demand better service with more options and at a lower price.
Companies aiming to capture a percentage of this huge market share will have no choice but to adapt, allowing for further innovation. I can't say for certain what the 401(k) will look like in 10 years, but I do think it will allow investors to invest confidently with a better understanding of fees and opportunities.
Kelly Campbell, certified financial planner and accredited investment fiduciary, is the founder of Campbell Wealth Management and a registered investment adviser in Alexandria, Virginia. Campbell is also the author of "Fire Your Broker," a controversial look at the broker industry written as an empathetic response to the trials and tribulations that many investors have faced as the stock market cratered and their advisers abandoned their responsibilities to help them weather the storm.