Understanding Your Defined Contribution Plans

Since the demise of Defined Contribution Plans (aka Pensions) is continuing in most companies, employers are turning to Defined Contribution plans. For most people this means a 401(k), 402(b) or a 457 plan. While some employers make modest contributions and a few make a matching contribution, this is the frontline to the YO-YO retirement plan (You’re On Your Own).

Virtually every survey shows that pre-retirees, especially those called “Baby Boomers” are totally unprepared financially for a comfortable retirement. With very little help from employer retirement plans and a diminishing hope for substantial help from Social Security, there is a real need to get serious about saving.

These Defined Contribution plans offer the advantage of tax-efficient retirement savings. The tax-deductible amounts permitted by the IRS are fairly substantial. However, the same surveys show that few people are taking even modest advantage of them. Further studies show that many with significant balances are relatively clueless as to how the money should be invested. This results in many sticking with low to zero yielding money market funds, Others have invested in so-called “Target Date” investments that failed to live up to expectations. Still others have taken excessive risk and seriously damaged their account values.

Since this is the most important part of a retirement plan for many people, we believe that its management should be taken seriously. For most people this will be the biggest pot of money they have aside from the equity in their home. That means employees should put as much as they realistically can into their plan. At the very least they should make sure to put in the minimum amount needed to get the maximum employer match if there is one.

You are on your own, but you do not have to try to do it all by yourself. When it comes to managing the investments within the plan we strongly believe they should get professional help. Unless you have the time, training and temperament you are gambling with your retirement future to do it alone. Looking at a quarterly statement once in a while and blindly shifting funds around cannot substitute for the vigilance of professional manager.