The recession’s impact upon baby boomers and their 401(k)s is deeper than anyone would have imagined, so much so that the entire way we go about saving for this time period in our lives may be transformed. Exchange traded funds (ETFs) may be playing a larger role in retirement portfolios as a result.So how much does the recession affect older Americans and their 401(k) plans? Britta Stromeyer Esmail for Suite 101 explains and examines how the industry at large is being transformed.
For one, the existing structure of the 401(k) is weak, as evidenced by the amount of Americans who lost 30% or more in their retirement accounts. This should not have happened, especially to those who were just a few years away from retirement.
The current system has plan participants picking from an array of 20-30 mutual funds and allocate their retirement dollars accordingly. Many of these participants lack the financial sophistication needed to make these decisions.
A new model is sorely needed. The ideal one would tout low fees, transparency, with a managed solution, and more flexibility. ETFs have been an answer for some time, as they trade throughout the day, and give investors greater flexibility with their transparency and low cost.
ETFs are widely recognized for their inherent risk management properties, particularly relative to comparable mutual funds. On top of that, there’s a performance issue: more than two-thirds of mutual funds fail to beat their benchmarks on a five-year basis.
On the average, most 401(k) contributers would benefit from an ETF choice in their 401(k) plans.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.