You don’t need a time-traveling DeLorean to see the value in a good idea from the past. A great “back to the future” type of 401(k) plan popular in the ’80s is being revived, one that promises to take a lot of pressure off small business owners and their employees.
Known as pooled 401(k)s, these plans started off strong with the rise of private workplace retirement saving. The idea was simple: Rather than force employers and participants to choose investments and assume unknowable risks, contributions are pooled into a single account guided by an expert fiduciary manager.
Everyone gets the same investment plan, greatly reducing the cost and trouble. The small business owner no longer has to put time and energy into an area where they have no expertise: prudent investment management. Instead, the effort and the legal burden are consolidated under a qualified portfolio professional.
For employees, it means the end of the cascade of high-priced mutual funds and complex retirement calculations. They get conservative, high-quality oversight of their savings at a fraction of the risk doing it themselves.
This is exactly the kind of plan a professional practice should consider. Think about the business revolution in accounting, taxes and information technology. What doctor or dentist wakes up thinking, “Well, I better get to work early and upgrade all the PCs in the office!”
Not a one. That work is farmed out to a highly efficient contractor. No surgeon sits down to do his or her tax returns, either. That would be suicidal, financially and mentally. Imagine telling an admin, “Cancel all my appointments until April 15. I’m going to be busy.”
Nevertheless, both employers and retirement savers fell under the sway of the ’90s bull market and financial TV, which seemed to provide daily confirmation that ordinary people could and should “play the market.” It was not just a good idea. It was an imperative.
So what actually happened to all those folks over the years? Bull markets came and went. People panicked and sold at the wrong moments. And they paid way, way too much in fees. Over the past 20 years the stock market returned 9.2% annualized. The individual investor earned a shockingly tiny 2.5%.
Double your retirement money
Put another way, the straight S&P 500 allowed you to double your money in less than eight years, while the average small investor would need more than 28 years — practically their entire career — to achieve exactly the same result.
In dollar terms, an employee who saves $5,000 a year earning that stock market return for 20 years compounds those savings to $285,683. The “typical” retail investor ends up with just $130,916.
In just 10 additional years, the prudent investor more than doubles again to $772,577. The zigzagging small investor will be lucky to crack $225,000. One is ready to retire. The other will have to keep working.
Like Marty McFly in the “Back to the Future” movies, small decisions made long ago dramatically change the future. It would be nice to jump into a time machine and fix things but it’s better, and easier, to make the right choices in the first place.