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A 401(k) Plan with No Conscience

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I recently reviewed a 401(k) plan adopted by an employer. They switched from their old provider to a major insurance company. In part, they were influenced by the "Fiduciary Warranty" the insurance company gave them.

Here's what I found:

The plan had thirty-one investment options. All but four were actively managed funds, with expense ratios ranging from 1.82% to 2.19%.

The real shocker was in the balance of the funds. The Money Market Fund had an expense ratio of 1.58%. The S&P 500 Index Fund had an expense ratio of 1.54%. The two other index funds had similar expense ratios.

To put these expense ratios in perspective, I checked the expense ratios of comparable funds from Vanguard:

The Vanguard Prime Money Market Fund (VMMXX) has an expense ratio of 0.25%;
The Vanguard 500 Index Investor Fund (VFINX) has an expense ratio of 0.18%.

What do the hapless participants in the plan get for paying 600% or more for the index funds in their plan? Funds that significantly underperform the lower cost funds.

What about the much hyped "Fiduciary Warranty." I obtained a copy. Here is an extract: "While [insurance company] is not acting as a fiduciary for the plan in selecting and monitoring the investment options in our offering, [insurance company] stands behind our products."

Translation: The misnamed "Fiduciary Warranty" absolves the insurance company from fiduciary liability for putting overpriced actively managed and index funds in the plan.

The plan participants are the real victims. The difference in the amount of money they will have available at retirement will be measured in the hundreds of thousands of dollars, because the plan options are not only overpriced but confusing. What are the chances of the average employee being able to put together a low cost, globally diversified portfolio in a suitable asset allocation from these investment options?

This plan is the poster child for the urgent need for legislative reform. Yet Congress can't even pass legislation requiring 401(k) providers to give transparent information about their fees or to accept real fiduciary responsibility for their advice. Without massive reform, the gravy train will continue.

Dan Solin is the author of The Smartest Retirement Book You'll Ever Read.

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