Beyond your control: What’s really to blame for America’s underperforming 401k system

By Neil Plein
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This is the transcript from an interview with Darwin Abrahamson, CEO and Founder of Invest n Retire®, whose slogan is “Record keeper of the future.” Darwin is considered a pioneer in the retirement industry and widely regarded as a true champion in the fight to enact industry standards that genuinely serve the average investor’s best interest. Since 1982 Darwin has worked with fiduciaries and pension administrators of qualified tax-deferred retirement plans. Mr. Abrahamson’s company has been mentioned in the New York Times, Washington Post, Wall Street Journal, Forbes Magazine and nearly all other major financial publications.

Neil: If you open any financial magazine, you’ll see an abundance of ads from every major 401k service provider stating that they have something different to offer, is that actually the case?

Darwin: No. Neil, the message may sound unique, but the offerings are not. The reality is, you’re going to get virtually the exact same thing on every platform; the only thing that will change is the person you talk to and the name of your plan. Fundamentally, however, the investments you use, the tools you access and the outcomes those things make possible will remain the exact same.

Neil: You mention that every platform offers basically the same things, which means that the “outcomes” continue to be the same; what do you mean by that?

Darwin: For a long time, the tide has been overwhelmingly against the average retirement plan investor. That is what I mean by a fundamental problem. The outcome as you can imagine, is exactly what we see everywhere; low balances, low participation, low contributions. There are ways to disguise this through catchy, colorful presentations made each time companies meet with their service providers, but the reality is, more and more people across this country are coming to the very rude awakening that they simply will not have enough money saved for retirement.

Neil: Why is this the case? Why hasn’t someone figured out how to really make things work for people on a large scale? It seems like a pretty obvious and major national problem?

Darwin: Neil, the real answer will surprise you and everyone else for that matter, because the real problem is something that’s totally out of almost everyone’s control; employees, companies, advisors; their struggle can be very clearly defined; because the efforts they make are based on a very narrow set of possibilities. The investments they have access to, the education they must deliver, the plan tools they must work with and explain, all are based on one thing; technology. That is the real problem with America’s 401k system, its technology.

Neil: What do you mean by that? People everywhere can go online to access their retirement plan, they have things like retirement calculators, where’s the problem?

Darwin: Sure they can do those things, but just barely. Retirement plans are one of the only aspects of our modern life that has not evolved technologically. The recordkeeping systems in place, the backbone of our industry, the technology, programming language and the like, at the core of nearly every major service provider; were developed back in the 1970’s.

Neil: Explain what you mean by that a little further:

Darwin: This is why plans have so many limitations, there are so very few meaningful changes made to improve things on a large scale, mainly because it just can’t happen at any realistic pace, large scale changes are unbelievably expensive. Can you even think of the last big change to hit your retirement plan? The last big thing that made the process a little easier? A website perhaps? That was significant in the 1990’s, what has happened since?

People have been using the same types of funds, relying on the same types of education and using the same types of plan tools for decades; because they had to! The industry as a whole has been held hostage by its dated technology for too long. And real change won’t come until that backbone is replaced by something modern. Think about your iPhone®, look at what has happened when the technology emerged to make “Apps” available, think about how much you can do now, how much easier things are. You can bet that Apple’s not accomplishing that by sticking with a decades old infrastructure.

Neil: Darwin, people may have a hard time wrapping their head around what you’ve just said, can you give a real life example?

Darwin: An example that comes to mind is with someone I recently spoke to who had their 401k plan with a large life insurance company. They actually had to print and fill out a form, then take that physical form to their HR department, just to get their contribution rate changed! Then think about your retirement calculator, you have to enter all of your own information in, the calculator has no ability to do that for you! Entering your age is not a difficult task, entering the return you anticipate from your investment portfolio is. The quality of the information coming out of retirement calculators is only as good as the information going in; and that information depends on the average person trying to turn themselves into an investment expert to perform all the manual tasks their technology should just perform for them.

The large 401(k) providers are all using legacy software that was developed 20 to 30 years ago before participant directed plans existed. This software is licensed, not owned and developed by the providers. Therefore, they do not have the advantage of designing software for participant directed plans that can use the latest investment options like ETFs or the latest Microsoft software.

Neil: Aside from the many benefits new technology would make available to people using 401k plans, what benefits would new technology offer major service providers who offer 401k plans?

Darwin: Well, new record-keeping technology for major service providers achieves three major goals that every business strives for; to decrease overhead, decreased errors, and increase revenues. The time savings and countless efficiencies will be crucial to remaining competitive in tomorrow’s 401k landscape. Providers should see this as a time for action, the longer you wait, the more behind you’ll be, the more expensive your inevitable transition will become.

Disclaimer: Invest n Retire, LLC does not provide tax‚ accounting‚ legal‚ or financial planning services or advice. Information provided is offered only for general information and education purposes and should not be used as the sole basis for making financial‚ investment‚ or retirement planning decisions. Past performance is not a guarantee of future performance. If you have specific questions you should consult with your advisors.

About Darwin Abrahamson
Darwin Abrahamson founded Invest n Retire‚ LLC (INR) in 2004. Since 1982 Darwin has worked with fiduciaries and pension administrators of qualified tax-deferred retirement plans. Darwin has written articles for several financial publications; including Financial Planning Magazine‚ Financial Advisors Magazine, and the Journal of Indexes. His articles have been syndicated by Universal Press Syndicate. Darwin wrote an article‚ Avoiding Redemption Fees in 401(k) Plans‚ for Financial Advisors Magazine in 2005. In response to a white paper published in the Journal of Indexes‚ June 2008‚ Darwin wrote a rebuttal‚ Debunking the Myth That ETFs Have No Place in 401(k)s.

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