The Inevitable 401k Bubble — And how to avoid it.

Most 401k participants are almost certain to fall prey to bursting bubbles. Here are two reasons why.

First, coaching and education is missing from 401k services. The participants are not generally well coached. Even though education is one of the requirements for safe harbor, almost no 401k provider offers any kind of systemized investor education. The annual education event put on by most 401k plan administrators is little more than a sales meeting aimed at additional product sales and transactions for the provider. Based on what I’ve seen over the past 20 years, coaching participants to make prudent decisions is non-existent.

Secondly, track-record data is promoted as the best way to make investment choices. Investment choices are offered to plan participants along with the track record data for the past five or ten years for each choice. This information is worse than irrelevant; although it is that, it becomes destructive for participants when applied over time. Ask yourself if this sounds familiar…

Step one: The uneducated, non-coached investor makes choices for investments using track records as the main criteria. If the fund has done well recently, the participant chooses that fund. He generally picks the top three or four funds based on this criteria. Since he now owns three or four funds he considers himself diversified.

Step two: The participant invests for a while. Since he just made the choices he ignores the meetings offered to him by the provider for a few years until he feels he should revisit the issue.  This period of time is, on average, between 3 and 4 years. Meanwhile, the provider of the 401k platform has had three annual meetings with the participant’s employer. Some of the better performing funds are kept and some of the underperforming funds are dropped and replaced.

Step three: The participant shows up for the review meeting and the topic of rebalancing is brought up. The new funds (surprise, these have a very positive recent track record) are offered as a way to “improve” the participant’s portfolio. This gets repeated over and over again. So, what has been happening? AFTER a certain fund class has done well, the investor buys it. After it underperforms, the investor sells it. Buying high and selling low. Always blowing the bubble of the higher performing asset classes closer to their bursting point.


Attend on the 29th of January to find out how. Bring your boss if you want to help him or her understand how this destructive pattern reduces your peace of mind – and how to stop it from being a reality for employees.

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