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Part 1: Auto-pilot is for airplanes, not 401ks

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Businesses that offer their workers a 401(k) plan for their retirement deserve a pat on the back for being responsible, corporate citizens and for helping their employees who seek to build up a good nest egg for their golden years.

But they’re doing their workers no favors by leaving most of the decisions about how those 401(k) funds are managed with the employees themselves, who may know a lot about their particular line of work but very little about the S&P 500 or the pros and cons of investing in stocks vs. bonds.

You know what happens. At the start of his or her job, the employee picks out a few investment products from a catalogue offered by his employer, and there the money sits, year after year, regardless of how it performs (even while other options may be performing better). The retirement plan is basically on auto-pilot, sailing through the storm clouds and clear skies of the stock market with no one at the wheel. From time to time the employee might make a few panicked decisions and move money around based on the ups and downs of the market or a hot, trendy idea, and end up achieving little in the way of returns. As a result, some employees stop contributing to their plans altogether.

Nevertheless, these participant or “self-directed” plans are typically the norm in the 401(k) world. The vast majority of company 401(k) plans are set up this way, where the participant – the employee – chooses the investments for his or her own retirement account based on a menu of choices provided by the employer. Available options tend to be the typical industry products of today; overly broad investments that are built for the masses – not the individual – and certainly not for transparency. And many of these plans, large and small, may be under-serviced and overpriced.

Employees are not investment professionals, and there’s no reason they should be. So why delegate the sole responsibility to them to make the most important financial decisions about their future? Many employers will say they offer their workers educational resources and advice about how to make sound investments. But a three-page brochure doesn’t really cut it.

There is a better way, for both the employee and employer.

Next week, better options for your company and your employees, as well as some questions each business owner should ask him or herself so that everyone benefits.

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Financial Planning Association of Massachusetts member Benjamin Beck is Managing Partner and Chief Investment Officer of Beck Bode Wealth Management of Dedham, Massachusetts. He can be contacted at benjamin.beck@beckbodewealth.com or 617.209.2224.

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