Today's retirement planning demands an increased attitude of accountability and personal responsibility.
Traditional employer-sponsored 401k plans offer employees a conservative and limited portfolio of deferred tax investments.
A Schwab Personal Choice Retirement Account® (PCRA) is a self-directed brokerage account (SDBA) that allows employees of an approved employer-sponsored 401k retirement plan access to thousands of additional investment choices. The PCRA is funded from the employees existing retirement plan and as such remains tax deferred.
Employer-sponsored 401k retirement plans are provided as an employee benefit that encourages retirement savings in a secure and tax efficient way.
Employer-sponsored 401k plans based on retirement age and a generalized portfolio seldom cater for an employees individual retirement needs. At the same time personalized investment portfolio's have historically yielded higher returns than generalized portfolios.
Employees need to be educated and equipped to manage and optimize their tax deferred retirement savings. This includes; trusting the employer-sponsored fund managers; operating a self-directed PCRA; engaging advisers to design personalized investment portfolios; structuring a comprehensive and tax efficient retirement plan.
Most of us intend to live for some years after we retire. But living in reasonable comfort for the years God allows requires a level of income, savings and cost management that needs proper planning. Yet, according to the NY Times, 23% of married couples, 46% of single people, receive at least 90% of their income from social security. Self imprisoned by their government!
The majority of middle class America works as an employee throughout their working career. They have no large inheritance to count on, and unless they win the lottery, or go back to work, their retirement income will come from a combination of social security, pension and savings. Of these three, only savings is left to the absolute control of the employee. Larger employers offer tax deferred 401k accounts to incentivize employee savings. And if these employer 401k plans include an employer match, this 401k tax deferred savings account will be a significant portion of a typical employees retirement resources.
Most employees unfortunately assume that these savings, including any company match and deferred tax efficiency, will be optimally invested for them. This is not automatically true. When Congress passed the Revenue Act of 1978 the only way to securely invest these tax deferred savings was for them to be allocated to age linked generalized funds. In the last 30 years, the Internet, an increased sophistication in financial instruments, technology platforms from brokerages like Schwab, Fidelity and Vanguard, have made it possible for employees and advisors to significantly optimize the investment of these monies.
Employers have wisely not attempted to follow these technologically enabled individual investment opportunities. 401k accounts need to be conservative and safe investments. Their yields are intended to be realized in many ten's of years into each employees future. In fact I suggest that most employers are struggling to effect their fiduciary duties, let alone educate each employee on their individual tax efficiency, an optimal risk profile and how to allocate their funds.
Employers who include support for a Schwab Personal Choice Retirement Account® to an existing employer-sponsored 401k plan, are effectively empowering their employees to take more control of their own retirement.
Editorial: No parent gives a two year old a loaded gun to play with. No parent stops a two year old from learning to walk lest they fall. And within these two wrong absolutes, the risk of death, a child who never walks, lies a whole world of safe parenting options. The same principle of appropriate responsibility applies to employers and the control of their employees retirement. Too little control leaves an employee at risk. Too much control results in stunted employees. But our comparison ends here. For technology has enabled changes in society that we never could have imagined.
Specifically, the Internet has produced trading platforms that allows employees to manage their own investment portfolios. And with access to software and tools that are more sophisticated than used by the best fund managers of 30 years ago. Not that this means employees make good fund managers. In fact it may be a good time to remember the old adage; any person who represents themselves in court may have a fool for a lawyer? The technology exists for employers to relinquish the management of 401k funds to their employees. With the risk that an employee might make poor choices and lose all their savings. And the reality, that to not embrace technology, or to not empower employees, risks a loss to all employees.
An answer may be found in the automobile industry. Would it be right to digitally govern a car's engine and prevent a driver exceeding the safe speed limit? Research shows that doing this would reduce the number of road traffic deaths each year. But society has decided that the value of empowered individuals, supported by driver education and traffic enforcement, outweighs the cost of excess speed and irresponsible driving.
If employer-sponsored 401k plans were a car, employees would be empowered to manage their own portfolios, most employees would enjoy the advantages of empowerment, but a few would lose everything. Unlike a fatal car accident though, any employee that killed their 401k plans would have the safety net of social security.
If employee-sponsored 401k plans were a car, we would all have 401k plan education, portfolio management skills, financial insurance, financial advisors, and financial enforcement. But employers would not be the ones to provide these capabilities. For the financial industry is ready to assist employers improve their employee retirement benefits without any increase in risk or cost to them. Financial advisors are ready to educate employees, or help them with their investments and retirement planning.
One wonders what "driving" changes employees need to consider for their retirement plans?