Watch the following PBS Frontline video on the financial industry and its involvement in the 401(k)...

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Watch the following PBS Frontline video on the financial industry and its involvement in the 401(k) retirement system and read the accompanying publication:

http://www.pbs.org/wgbh/frontline/film/retirement-gamble/(Links to an external site.)

TheRetirementSavingsDrain.pdf

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Write aminimumof at least three pages on the following questions (size 12 font and double spaced). The paper needs to be submitted as a Word document file into Canvas (Vericite). Cite all of your sources. For each of your answers I want you to provide clear reasoning detailing your position using concepts and economic logic learned in class and from the textbook.

1) Why is there a market failure in the 401(k) market? (Hint: read chapter 8 and its description of imperfect information)

2) Describe and detail all of the fees/costs associated with a 401(k).

3) Calculate two individuals total amount of retirement assets after 30 years of investing using the following two examples to display and articulate the effect of compounded fees on two different individuals' retirement accounts with the exact same mutual funds. The two mutual funds have the same before expenserate of return, but one mutual fund charges a higher expense ratio than the other. Describe what effect fees have on the two different individuals' retirement assets:

(a)
Yearly Savings: $15,000, Inflation Rate: 2%, Rate of Return:(8.15%-.15%=8%), Expense Ratio of Mutual Fund: .15%, Periods: 30 years

(b)
Yearly Savings: $15,000, Inflation Rate: 2%, Rate of Return:(8.15%-.65%=7.50%) (It is lower than example (a) due to the increased expense ratio), Expense Ratio of Mutual Fund: .65%, Periods: 30 years

Use this financial calculator website for the examples:

http://www.financeformulas.net/Future-Value-of-Growing-Annuity.html(Links to an external site.)

4) Describe and come up with your own solution to alleviate the problems with 401(k)s.

Vasudha · Accepted Answer

1. Market Failure for 401(k):
a) Although 401(k) plan is designed for the retirement benefits of the citizens, this is not the perfect plan. The amount which is accumulated in the lifetime of the individuals is reduced to 65 percent when they pensioners retire. 
b) There are flaws in the 401(k) plan, which may be categorized as poor investment decision, high fees and volatile market. All these factors projected as a failure as a primary investment plan.
c) 401(k) plan uses the concept of dollar-cost averaging, but this theory has its own flaws, this theory is not always reliable, in this investor divides the total amount to be invested across the investment period in order to reduce the volatility for the total amount. 
d) Over the period of time this plan becomes expensive with the high-administrative and record keeping charges which are levied to the investors/pensioners.
e) With the other options of investment like index or benchmark funds, there is lot of savings over a period of time, even the 1% savings in the cost means a lot at the end of the retirement plan.
f) 401(k) expenses are high, like participation fees, supplemental asset based charges, itemized services such as loans and hardship withdrawals. These higher fund expenses are mandatory and costs more to the investors.
g) Record keeping information is not user-friendly and manually calculate annualized rate of return. 
h) 401(k) has the limited investment choices for the investors.

Watch the following PBS Frontline video on the financial industry and its involvement in the 401(k) retirement system and read the accompanying publication:...

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