Wednesday, June 29, 2011

Smartest 401(k) Book You'll Ever Read: Maximize Your Retirement Savings...the Smart Way! (Review)

Dan Solin, author of The Smartest Investment Book You'll Ever Read: The Simple, Stress-Free Way to Reach Your Investment Goals, has just applied his ability to simplify the often complex world of investing to the realm of the ubiquitous 401K plan.

This latest book, Smartest 401(k) Book You'll Ever Read: Maximize Your Retirement Savings...the Smart Way!, provides an excellent introduction to traps and pitfalls of the corporate retirement vehicle in just under 250 pages. That alone is a remarkable feat, given the often tome-like volumes of investment advice out there.

This is book that every new employee should read if their employer provides a 401k plan. Here's why...




The pitfalls of 401k plans

It will come as no surprise to experienced investors, or those who take an active role in their 401k plans that the fees on some funds can be outright absurd. Solin spends quite a bit of time describing and making the case that exorbitant fees of some 401k plans make those plans worse than useless.

This book should open your eyes to why the concept of a tax deferred retirement plan is a wonderful thing, and why so many 401k plans fall short on implementation.

Fear and uncertainty about taxation

One of the weaker parts of the book is when Solin raises fears about the possibility that 401(k) contributions could become taxed in future. He points to cases in the past where congress has enacted retro-active tax hikes.

My biggest problem with this line of thinking is that he advocates using IRA and Roth IRA plans in place of 401k plans through much of the book, but there's nothing to prevent congress from taxing those plans in the future either, so he offers this bit of fear and uncertainty about the future with no realy solution or action to minimize this risk.


Solutions

What makes this book so good is that Solin not only lays out the pitfalls and mine fields of many 401k plans, be he also provides some basic roadmaps for navigating around those trouble spots.

He offers practical solutions for what to do when the funds offered in your 401k plan are loaded with fees, or when they are perennial poor performers.

He offers simple ways to make better choices in plans with a mix of good and bad funds and he tells the reader which kinds of funds to avoid.

Conclusion

Solin often rails against high fees and poor disclosure of 401k plans. He has a very good point - for some 401k plans.

The problem is that his criticism of 401k plans is often presented as though it is true of all plans, and this is simply not the case. There actually are some very good 401k plans out there, and they are not all run by greedy leeches, trying to suck your financial future dry.

Some certainly are, but not all. I think this book should serve as a starting point to get those employees unfamiliar with the 401k deferred retirement plan more involved. It can give them the information to make the decision on their own about their individual 401k plan.

Aside from his view that the majority of 401k plans are run by greedy and incompetent fund managers he also exhibits the companion view that most investors are incapable of picking good funds regardless of whether it's in an IRA or 401k.

This for me was one of the weaker aspects of the book, because it is coupled with his promotion of DFA index funds. The problem here is that he works for Dimensional Fund Advisors, so after pointing to conflicts of interest in 401k plans he then engages in his own conflict of interest by promoting his company's index funds.

That doesn't make it a bad book, but in my mind it keeps it from being a great book.

Despite its shortcomings,Smartest 401(k) Book You'll Ever Read: Maximize Your Retirement Savings...the Smart Way!is a recommended read for anyone who is new to the 401k world, or who just wants to get a better handle on how to get the most out of their 401k plan the right way.

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