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On December 17, 2014, Maryland-based aerospace company, Lockheed Martin, reached a settlement for the billion-dollar lawsuit filed against the company for the mismanagement of employees’ retirement funds. The company’s 401K plan, considered one of the U.S.’s largest, has over 120,000 participants and holds more than $20 billion in assets. The handling of the plan came under attack upon revelations that the company took part in questionable practices that involved selecting retirement funds that boasted high fees, thus compromising the value of employees’ retirement accounts. It is believed that the billion-dollar company failed to act in the best interest of the employees, and consequently managed the retirement plan in a way that according to attorney Jerome Schlichter, “violates many of the industry’s best practices.”This incident will not only impact how businesses select 401(k) plans going forward, but, in light of the poor choices made and exorbitant fees, the Lockheed Martin case now calls into question whether 401Ks are the best vehicle for retirement.
Notable alarming facts include:
401Ks were not originally intended for retirement planning.
The 401K was created by U.S. Congress 30 years ago as what former Time Magazine Managing Editor, Richard Stengel calls a “tax dodge for executives.” Stengel goes on to state that it was “never meant to be the primary vehicle of retirement for Americans, but over the past 20 years it has become so.” While 401Ks were once considered a supplement to one’s pension and Social Security benefits, with fewer companies offering pension plans, 401Ks have now become the primary source of retirement income for many. Moreover, as the 401K is still a relatively new program for saving for retirement, there is little insight into its true effectiveness long term.
401Ks are subject to high fees, market fluctuations, and taxes, thus depreciating its value.
There are multiple factors that can deplete the value of a 401K over time, the most prominent being the fees involved in managing and administering a 401K plan and the mutual funds inside them. There can be as many as 17 fees including administrative, investment-management, soft trading costs, record keeping, consulting, etc. that vary in cost depending on the service provider and over the years can translate into a significant amount of savings lost.
In addition to service fees, 401K plans are greatly affected by the market and the mutual funds used to fund the plans. According to Employee Benefit Research Institute Statistics, during the financial crisis of 2009, 401K plans dropped in value on average by 25%. According to Dalbar, a leading research firm, from December 31, 1993 to December 31, 2013 - over 20 years, the Standard and Poor’s 500 average annual return was 9.28%, but the average mutual fund investor made about 2.54%, a nearly 80% difference.
Also, to ensure these taxes are paid, the government has even imposed a Minimum Distribution Requirement for seniors past the age of 70 ½. All qualified plans that are funded with pretax money will have to pay income taxes on any distributions taken out. These decreased 401K values can lead to insufficient retirement savings, a growing trend that has forced many seniors to work well into the 60s and 70s.
Company 401K plans might be managed by employees who lack the necessary skills and experience.
Since 401Ks do nothing to “boost a company’s bottom line,” Mike Alfred, CEO of BrightScope, a financial information company, claims that 401Ks have become “something of an afterthought” for companies, where in the worst cases, the task of managing funds can be left to “mid-level employees who have little experience selecting investments.” Unfortunately, since a high percentage of employees are unaware of how retirement funds are managed, these types of problems can go unnoticed for a long time.
Robert Lewis, Managing Director of LFG Advisors, a retirement planning firm based in Plymouth, Massachusetts, has created retirement programs for individuals and companies for the past 23 years, stating that “people are often in the dark about the true costs of retirement plans and the mutual funds used to fund these plans. The majority of people accept these common retirement solutions without exploring the other options that are available outside of the traditional 401Ks.” Lewis further adds that, “the goal of retirement plans should be to create a predictable income stream at retirement that is non-taxable, and can last an entire lifetime. This way, the government, taxes, or the economy won’t put people in a position to have to materially change one’s plans for retirement.”
Contact Info:
Name: Robert Lewis, Retirement Planner
Email: Send Email
Organization: LFG Advisors
Phone: (508) 453-1275
Website: http://www.lfgadvisorsllc.com
Source URL: http://councilofeliteadvisors.com/liftmedia
Release ID: 70980
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