401Ks: Main Street’s Friend or Foe?

After the market was pounded to the tune of -40% last year, most didn’t think that it could get much worse.   Well it has.  January and February of 2009 have the esteemed privilege of being the worst first two months in the DOW’s 113 year history.  After two months, the DOW is off nearly 20%.

If that doesn’t make you want to take your ball and go home – I don’t know what will.  Guess what?  Most aren’t.  Working folks continue plowing money into their 401Ks each week employing Wall Street’s tried and true – stocks for the long run strategy.  Now all that is needed is for the magically bull market rabbit to make everything alright.  It will be years from now, but I believe that Company Sponsored 401Ks will be another good idea that didn’t pan out for the little guy.

The average person wants to go to work, raise their family and retire in peace.  Dealing with “complicated” financial stuff is not part of the plan.  Understanding this desire, Wall Street created the 401K – a dumbed down product with limited fund selections, a passive investing strategy and low level advice to match. Best of all, the products bring in tons of money from fees regardless of performance.

I believe these characteristics make poor investment vehicles, but the sub-par advice offered and inadequate educational efforts makes 401Ks dangerous. Instead of people refusing to look at their statements, they should be  making contribution adjustments and to modifying their allocations. Someone should be explaining that time works against you with retirement strategies.  At a certain point, you simply can’t make up for lost time. Most faithful 401K participants haven’t made a dime in the last 10 years.  That’s if they are lucky. Many have lost thousands of dollars.  Another like decade could put many beyond the point of recovery.