I recently reviewed a large 401(k) plan. I found many of the problems which make these plans such a rip-off: Mostly proprietary, high expense ratio, under performing, actively managed funds, conflicts of interest, revenue-sharing, hidden costs and fees and the misuse of "fiduciary" by an adviser to make the employer believe he is assuming liability for the selection and monitoring of investment options when all liability remains with the employer. Nothing new or surprising here.
Until I found the one index fund in the plan.
It was an S&P 500 index fund with an expense ratio of 0.50%. That seemed odd since the plan administrator had its own S&P 500 index fund with an expense ratio that was a fraction of that amount.
If there is one thing I have learned over the years, it is that the goal of the securities industry is to separate you from your money. Almost all of their actions can be understood in that context.
So why would an administrator bypass its own low cost index fund for a much higher cost one from a third party?
For two good reasons:
First, it receives revenue sharing payments from the third party.
Second, an index fund with a high expense ratio is going to have historical returns that under perform the index. When these returns are shown to plan participants, and compared to the high expense ratio, actively managed funds from the fund family of the administrator, most plan participants are going to select the proprietary funds.
An index fund with a high expense ratio should be an oxymoron. Yet, brokers continue to advise investors to buy these funds. Academics who study investor behavior call this phenomenon the "Index Funds Rationality Paradox."
A leading study concludes this conduct is "...largely driven by an identifiable group of unsophisticated investors that buy funds through brokers."
However, this is not the case with 401(k) participants if their only choice is one of these unsuitable index funds. They are caught between a rock and hard place: Either they buy an expensive index fund that will under perform the index or a more expensive, actively managed fund that is likely to do the same.
Either way, the mutual funds and the plan adviser win and the participants lose.
The employer is either ignorant of these shenanigans or doesn't care. It believes the plan doesn't cost it anything.
These guys are good!
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What options can you provide those of us who stayed in, given the current economic mess?
This can be challenging in a 401(k) plan. I provide help on for those confronting in this issue in The Smartest 401(k) Book You'll Ever Read.
Don't be lazy. Do your own research. Remember this - owning a company (owning stock) is useless unless you collect a dividend. What good is being a landlord if your tenants never pay any rent?!?!?!
Get gold and silver.....physical metal, not that imaginary stuff they peddle in these ETF's.
What I would call this is a trust issue. Bankers and insiders in the money business have assured us since we took our first baby steps that they could be "trusted" with our money. Our government assures us that our money is safe, by guaranteeing it with the bankers, for pity's sake!
We extend this trust to those on the "inside" of our value system, because we don't have the ability or skills to take on the full-time job of watching over and investing our monies, because we have to make the rest of the world go 'round, you see. We are the ones who fix their plumbing, right their electrical problems, babysit their kids, work on their cars - and you would think that if they expect us to do right by them in service and price, they would return the favor. It's called the "social contract".
To find out that we have been conned, scammed, bilked, robbed by those "in-the-know" in this industry tells me that it is overrun by depraved, unprincipled pirates that all deserve to be jailed for the harm they have perpetrated on the public. They aren't just "savvy in financial matters", my friend, they are CRIMINAL.