With Mitt Romney selecting Congressman Paul D. Ryan (R-WI) as his Vice Presidential Running Mate, we can expect to hear more about “Private Accounts”. Representative Ryan had proposed this (a common theme for Republicans) previously and it would apply for workers of Age 55, or under. Initially, it has been suggested that four percent of the FICA (or Payroll) Tax would be eligible.
If this works like the Retirement Plans that Federal Employees can pay into, participants would have the ability to chose from a number of Index Funds. With Index Funds, participants’ money is generally invested across the total spectrum of companies within the particular Index(s) (i.e. S & P 500, Russell 3000, EAFE, etc.)–both the good and the bad. But, the problem might be with selection and conviction. Here, I see similarities with the selection of 401(k) investment options.
Although many employers try to educate their employees–as to how to invest and select complementary investment options–I believe that most employees do not have a clue as to what is in their Retirement Plans. As a result, they often tend not to review it when the Quarterly Statement arrives, let alone more frequently. Think about it: if you do not understand the various options, how do you pick-and-chose among them? As a result, many participants don’t make any changes.
Lack of Conviction has been a real killer for many participants. When the markets have a sell-off, such as in 2007-2009, some shift everything into Cash. And, having been burned once, they never re-allocate their portfolio. Accordingly, there are many participants who have virtually no growth toward retirement. Think of the yield on your Money Market Account or CDs.
Another problem is the common knock on mutual fund investors–especially those who frequently move in and out of various funds. When they see how their funds have performed historically (from their statements), they wonder why their account hasn’t done the same. Unfortunately, they invest at the top of the market and, then, they sell after it has dropped.
Once again, if you work with a Financial Advisor–or have access to the Morningstar.com web site–pick a combination of investment funds that have performed well–and are complementary. As always, past performance doesn’t necessarily guarantee future results.