Daniel R. Solin - The Smartest 401k Book Youll Ever Read: Maximize Your Retirement Savings...the Smart Way!

PART ONE
Rules for All Investments

PART TWO
401(k) Plans: Rigged to Rob Your Nest Egg

PART THREE
How to Beat a Rigged 401(k) System

PART FOUR
The Care and Feeding of Your IRA

PART FIVE
403(b) Plans and AnnuitiesThey Make 401(k) Plans Look Good!

PART SIX
Alternatives to Traditional Retirement Plans

PART SEVEN
The Closing Argument

I wish I could accuse Congress of merely dithering on much needed 401(k) reform. The reality is that nothing on the regulatory horizon will address the core problems of a broken and corrupt system.

Its actually getting worse since this book was first published in June 2008. Because of the stock market crash, the average 401(k) plan participant had less money in her plan at the end of 2008 ($45,000) than she did in 1998! And she didnt have much thenonly $47,000.

By some estimates, more than 33 million retirees are in danger of living their retirement in poverty. Whether these retirees and others to follow will be able to rely on Social Security and Medicare is unclear. Both programs are vastly underfunded. Social Security is underfunded by $10 trillion and Medicare is facing shortfalls between $65 and $85 trillion. These are scary numbers.

The 401(k) System Is Still Fundamentally Flawed

All of the problems with 401(k) plans I noted in mid-2008 remain unchanged. They continue to be a giant skimming operation, where brokers and mutual funds act in concert with employers to deprive employees of market returns that are theirs for the taking.

Most employers still sell out the best interest of their employees, by taking what amounts to a payoff from brokers who agree to subsidize the administrative costs of the plan. In exchange for their free plan, employers agree to let brokers select the investment options available to plan participants. No good can come of such an arrangement and none does.

The broker has hit the lottery. In exchange for paying for the administrative costs of the plan, he gets a monopoly on selecting the mutual funds for the plan. How does he make this selection? He accepts revenue-sharing payments from mutual funds. Those funds that pay get into the plan. Those that dont are shut out. More than 90 percent of plan advisors take these kickbacks, which are rarely disclosed.

What kind of mutual funds participate in this scheme? Actively managed (I call them hyperactively managed) funds, which attempt to beat a designated benchmark, like the S&P 500. Typically, low-cost, outperforming index funds will not pay revenue-sharing. The leader in low-cost index funds, Vanguard, falls into this category. According to its director for institutional sales, when brokers realize they wont be compensated for placing our funds in a plan, they will typically hang up on us.

Some of the abuses are really striking. Most mutual funds have two classes of shares: investor shares and institutional shares. The only difference is the cost charged by the fund family for operating each share class, which is deducted from investors returns. Institutional shares typically require a higher minimum investment of $500,000 or more. These shares charge less than investor shares, which have far lower minimums. Lower fees are directly correlated with higher returns.

While most individuals cannot meet the minimum required to purchase institutional shares, many 401(k) plans can do so by aggregating the purchases of plan participants.

The savings to plan participants can be significant. For example, in a class action against Wal-Marts 401(k) plan sponsor, the plaintiff alleged that Wal-Mart cost plan participants $60 million in unnecessary expenses over a six-year period by not insisting on institutional shares rather than investor shares of the mutual funds in Wal-Marts 401(k) plan.

Everyone Winsbut Employees

Everyones a winner in this cozy, secretive systemexcept employees. They are frequently deprived of access to low-cost, higher-returning index funds. Their plans have much higher costs than plans where no subsidies or revenue-sharing payments are paid.

The consequences of high costs can be devastating. According to the Department of Labor, a 1 percent difference in costs can reduce your account balance at retirement by a whopping 28 percent.

Dont expect your employer to take the rowing oar in reducing plan expenses. Remember, the plan is free to them. One study estimated that 78 percent of plan sponsors did not even know their plan costs. Why should they care? You are paying these costs.

Rome Burns While Congress Dithers

Clearly, this is a system ripe for regulation. So what is Congress doing to curb the excesses that will likely cause millions of retirees to spend their golden years in poverty?

Not much.