Rapidly declining account balances are raising questions about how Americans save for their retirement. But is the 401(k) or IRA really to blame for this mess or are the Wall Street custodians that manage them to blame?
America needs to wrestle back control of their retirement accounts from the Wall Street custodians that have been managing, and limiting, the investments options. According to the Congressional Budget office, a whopping $2 trillion dollars of retirement savings has been lost over the last 15 months due to the market’s decline. As losses mount, many, including Congress, are beginning to question the current 401(k) based savings model. But would the entire system need overhauling if individual portfolios were better diversified? If custodians allowed all of the investment options that are allowed by law, would the mess we’re in be as dire?
The 401(k) is rightfully expected to go under the microscope with the new administration and overwhelming popular sentiment that retiring at sixty-five for most Americans is a pipe dream. But don’t blame the 401(k). The 401(k) is a well-structured retirement vehicle that encourages employees to save with tax-deferred contributions. It also allows the corporation or small business to contribute to the employee’s account and earn tax savings of their own. A 401(k) can provide a significant amount of retirement savings over the course of a career if the contributions are invested wisely. So what’s the problem?
The problem is that most 401(k)s are managed by banks and Wall Street custodians that only allow investments from their portfolio of products. Since the custodian doesn’t profit from other types of transactions, they aren’t allowed. But are they legal?
“Absolutely,” according to David Coe, founder of Freedom Growth, a California company that helps investors incorporate real estate into their retirement accounts. “Self-Directed IRAs have been legal since the inception of the 401(k) and the IRA. The law provides a very broad range of investments, allowing for well-diversified retirement accounts that are less impacted by severe market declines like we’ve experienced in the last year.”
Then why aren’t more retirement portfolios truly diversified?
