Do people really understand their 401(k) plans? The answer, according to certified financial planner Robert Braglia, is — in two words — "absolutely not."
But that's not, for the most part, their own fault, said Braglia, president of American Financial & Tax Strategies.
"People want to know more and understand, but most of the information they can access is from the vendors who have a single point of view at best and a vested interest at worst," he said.
A few of the misunderstood 401(k) plan aspects Braglia cited include:
- The "automatic" option: People often assume that it must be a good choice for them because it was developed by someone with expertise.
- Expenses: While an employer may have chosen a high-cost plan, the fund options often have a wide range of expenses, and sometimes employees are swayed by higher-cost funds with fancy names.
- Available options: Employees don't realize that plans often have a 'self-directed brokerage option' through which they can buy, for example, low-cost index exchange-traded funds.
- Employer stock: Not a good idea, because typically they will be over-concentrated in this from programs such as stock options, restricted stock grants, payroll-deduction stock purchase plans, etc.