Problem with the 401(k) System?

Here is a great article that illustrates one of the shortfalls of our current 401(k) retirement system: the people in charge either don’t want to be in charge or don’t have the time, skills and/or knowledge to be successful in managing the 401(k) plan.

The article gives three case studies that in my experience are representative of many plan sponsors.

Case 1: [The Business Owner] only agreed to set up the plan on two conditions: It wouldn’t cost the company a dime, and he wouldn’t have to deal with it.

Case 2: “As long as you don’t charge us any fees”

Case 3: “It was nice to think there was enough smartness in the group to help pick [the plan’s investment options],” says…the general surgeon who chairs the committee…Smartness isn’t always enough, though.

Quite often 401(k) plans sponsors believe that once they setup the plan and hire the broker all responsibility has been passed to someone else (e.g. the broker and/or participants). However, from a legal standpoint, and I would argue from a business and policy standpoint, this is wrong. See our webinar on Fiduciary Best Practices: A Guide for Small Employers for details.

Also, many 401(k) plans sponsors, being good business people, will make sure the fees paid by the company are reasonable and fair. (Or even better then fair as illustrated by the above quotes!)

However, sponsors are much less likely to worry about the investment fees paid by the plan participants. 401(k) providers know this and use it to their advantage by burying hidden fees in the various investment products they sell.

Even really smart people – doctors, lawyers, scientists – generally don’t have the knowledge or time to unravel the complicated mess that is their 401(k) plan fees, again a fact that providers know and exploit.

There are a number of bills currently pending in congress that would require full fee disclosure both to plan sponsors and, most importantly, to plan participants. Let’s hope one of these bills can make it into law without being too watered down.

For more information on plan fees see our recently completed webinar: Understanding Retirement Plan Fees.