IRS Publication 590 offers befuddled taxpayers more than 100 pages of "guidance" -- much of it in language a normal person would never use -- on how to comply with the rules and regulations governing Individual Retirement Arrangements.
That's right, "arrangements." The federal government's propensity for bureaucratic language spurred the retirement industry to come up with a more marketable name for the popular retirement accounts.
Gobbledygook aside, IRAs are only one type of retirement account. There are separate, but equally inscrutable, rules for 401(k)s and 403(b) plans. It's a challenge to understand the regulatory landscape when it comes to conventional retirement accounts, where contributions are tax deductible, vs. Roth accounts, where they are not.
Simplicity is no longer a virtue, laments Robert Nusbaum, a financial planner in Mount Lebanon, Pa. "Trying to explain the choices for retirement investing to young couples is staggering," he said. "It's hard for me to keep up with it, never mind the everyday person."
Nusbaum and his wife, Kathryn, a financial planner and certified public accountant, operate Middle America Planning. The firm advises "middle Americans," people who aren't wealthy enough to afford accountants and lawyers to deal with the constantly scrambled maze of regulations, Nusbaum says.
"It's the everyday people in the middle who are stuck with the complexity," Robert Nusbaum said.
The Nusbaums attribute much of the perplexity to the federal tax code.
Take retirement accounts. Each type has its own set of rules governing contribution limits, withdrawals and tax implications. Then there's the issue of whether to save in a Roth or conventional account. The amount of time and money being spent on that question disturbs Nusbaum, particularly because the answer must be based on uncertain factors, including what tax rates will be in the future and which bracket the IRA investor will be in when they withdraw money.
"The decision is wildly complicated, and even experts come down on both sides of the issue," he says.
Once baffled investors settle on the type of account, they face a bewildering array of investment options. Even eliminating a lot of legitimate investment choices and considering just mutual funds does not make things much simpler: Morningstar's Principia database contains information on more than 27,000 mutual funds, Nusbaum notes.
"It is testament to an industry that is based more on marketing than on stewardship," he says.
Many funds were designed to take advantage of the ever-changing provisions of the tax code. Nusbaum believes that the mind-numbing number of options and increasing complexity of the tax code makes investors slaves to the products and laws originally intended to help them retire comfortably.
"You kind of have to do a Rubik's Cube putting things together," Kathryn Nusbaum adds.
The Nusbaums recommend simplifying things by using index funds, which try to mimic the performance of the S&P 500 and other broad market indexes. They say most active managers who try to outperform the market fail and that the funds they manage cost more than index funds. For that reason, they are big fans of the Vanguard mutual fund family, a pioneer in index fund investing, and Vanguard founder John Bogle.
Target date funds -- portfolios designed around an investor's expected retirement date -- can make sense for young investors, but they're less appropriate as investors grow older and their finances become more complex, Robert Nusbaum said.
He believes that it's possible to design an effective, diversified retirement portfolio with fewer than 10 index funds that provides exposure to stocks, bonds and other assets. He cites the Thrift Savings Plan for federal workers as an example. It gives workers two sets of five options: three stock and two bond funds for workers who want to build a portfolio themselves, and five target date funds for those who prefer having someone do it for them.
Complexity extends beyond retirement savings. Parents saving for their children's education also face myriad options, each with advantages and disadvantages.
Sooner or later, Kathryn Nusbaum warns, "the whole system is going to break."