Okay, the title might be a little misleading in regards to how I really feel about 401(k) plans… I do think that these plans are (or can be) good for a lot of folks, as long as they use them correctly and follow sound investing principles. But that’s not what this post is all about.
I recently read a very good article that echoes a sentiment I’ve written about before: this article speaks to how the 401(k) plan is one of the places that the average Joe Employee is getting ripped off – you can see the actual article here, and I’ll summarize below.
The 401(k) Dirty Little Secret
Without getting too technical about all this, the problem is that most 401(k) providers are able to get away with supplying a plan that is high in cost when compared to the rest of the marketplace, with no one but the plan participants (read that “employees”) bearing the brunt of the cost. And furthermore, the plan participants have little to no say in making changes to the plan in their favor.
Since there is no legislation to make true fiduciary responsibility a requirement – meaning that the plan provider must act in the best interests of the plan participants – most often the plan and the investment choices are among the highest internal cost investing options available. Since the way the fees are charged is totally at the back end (at the mutual fund company, usually) and the employer sees little or no up-front costs, the employer is happy with the plan.
In addition, the mutual fund company is thrilled to have a captive audience with only their funds available to be invested in – which translates into new deposits for the company for nearly no marketing cost. And of course the agent who sells the plan is ecstatic: for literally no ongoing effort, he is able to rake in a percentage from each and every dollar that goes into the plan.
However – the tide may be turning in favor of the employee. As indicated in the article, a recent Eighth Circuit Court of Appeals decision held that there was merit to the complaint that WalMart’s 401(k) plan included high-cost funds when lower-cost funds were available, and that subsidies given to the plan’s trustee could be in violation of ERISA law.
We’ll keep watching these developments, as this could be a major turning point for 401(k) plan participants. Hopefully this is just the start of good news for employees, who have continuously been given short shrift with regard to retirement plans.
Photo by mikebaird
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I can learn from you, you can learn from me - please leave your comments and links!Jim Blankenship, CFP®, EA, is an expert in personal retirement, IRAs, and tax issues, with more than 25 years of experience in the industry. Read more from this author
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