The perversion of 401(k) plans into an $80 billion annual trough from which brokers, insurance companies and mutual funds shamelessly feed, is disturbing to anyone who understands how this system works.
There's so much blame to go around it's hard to know where to start. Employers are either ignorant of how their employees are being ripped off by excessive fees and poor performing investment choices, or they just don't care as long as their plan costs them "nothing." Brokers and insurance companies know exactly what they are doing: maximizing fees (and penalizing returns) through "revenue sharing payments" extracted from mutual funds who are pandering to be included as investment options in the plan. Mutual funds populate the plans with high expense ratio funds and earn obscene profits from having a captive audience of mostly unsophisticated plan participants.
Two recent developments may foretell a crack in this sleazy, ethically bankrupt system.
The Center for Retirement Research at Boston College issued a report which looked at the costs of the typical 401(k) plan. The report questioned the common practice of including actively managed funds (where the fund manager attempts to beat a given benchmark) as investment options in 401(k) plans. The authors concluded the inclusion of these funds exposed plan participants to a "substantial amount of additional risk" because only a small percent of these funds were able to beat their benchmark by the amount necessary to cover their high transaction costs.
The solution to the crap shoot of trying to pick the tiny percentage of out-performing actively managed funds is to eliminate them from 401(k) plans altogether. Instead, the report recommends the use of Exchange Traded Funds and commingled trusts which could "boost the net returns on participants' balances by 0.7 percent of assets or more."
An even better solution would be to offer participants only pre-allocated portfolios of globally diversified, low cost stock and bond index funds.
The reason why costs are so high in most 401(k) plans is that it suits the interest of brokers and mutual funds to keep them high, which increases their profits. However, a recent federal court decision may provide a meaningful disincentive for this conduct. In Tibble v. Edison International (CV 07-5359), Judge Stephen V. Wilson ruled on a class action brought by participants in Edison's 401(k) plan. The case was brought in the United States District Court for the Central District of California.
In a ground-breaking decision which could change the landscape of 401(k) plans, Judge Wilson ruled Edison violated ERISA by including the retail shares of three mutual funds in its 401(k) plan when less expensive institutional share classes of the same funds were available. Judge Wilson held "a prudent fiduciary acting in a like capacity would have invested in the institutional share classes", since the only difference was the cost of the two shares.
The potential damages for the plan participants could be substantial. The Court set forth a methodology which involves computing the difference in cost between the two share classes over the relevant time period and also calculating the loss of additional investment opportunity caused by the reduction in returns to the plan participants.
Over the years, I have reviewed many 401(k) plans. Over 90% of them use retail shares even though lower cost institutional shares were available. The cost to plan participants (and the benefit to brokers and mutual funds) is in the billions of dollars.
While these developments are most welcome, there is a long way to go. As indicated in the study by The Center for Retirement Research, and in hundreds of other academic studies, no prudent investor should invest in actively managed funds which are unlikely to equal benchmark returns, when index funds will always track the index, less low transaction costs. Most index funds have only one class and their cost is typically significantly less than the cost of both the retail and the institutional shares of actively managed funds.
Plan participants who wish to gamble with their retirement funds could be offered a self-directed brokerage option.
Hopefully, the next litigation development will hold fiduciaries responsible for the inclusion of actively managed funds, and for their failure to include pre-allocated portfolios of low cost index funds, Exchange Traded Funds or passively managed funds, as investment options in 401(k) plans.
When this decision is handed down, the leak in the 401(k) gravy train will become a flood.
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Maybe the "subject" is demonizing others. It has to help business. Research also shows extreme views get the most attention online. Fair enough.
100,000 in the bank gives you only 650 a month or less, again high fees and all
thats a poor return, as I could pay off a house or condo with that much
What I don't understand is why you think this is a 401k issue. If true, then this is an issue for all investment accounts....IRAs, 403(b)s, brokerage accounts, etc.
trying to change the subject?
"Haters" may be the loudest voices but they are never the best to follow - especially on complicated matters about retirement finances. Here's our post on the matter: http://richandco.tumblr.com/post/841024728/have-the-401-k-haters-been-satisfied-or
Ric Lager
Lager & Company, Inc.
i would like to have it all in Etrade or schwab, but it is hard to move the money
Maybe I should though?
I actually stopped doing contributions because I think I'm better off having cash and I'm planning to go to Mexico to retire
The average account balance among workers is somewhere in the neighborhood of $45k. Better hope you die quickly after retirement!
Workers need to start early and invest for the long term. Auto enrollment makes that easier. If you have a better idea for planning for your future, go ahead and opt out of the 401k. Takes 5 minutes.
that isnt good
A tax payer funded pension to Wall Street is like a State-run lottery was to a number running mobster.
401(k) plans are an $80 billion annual SCAM used by Brokers and others to SCAM:
MAXIMIZING EXCESSIVE FEES TO GIVE MANAGERS BIG PROFITS
P00R PERFORMANCE OF THESE PLANS
"Revenue sharing payments" Extracted from Mutual Funds
TORTURE A CAPTIVE AUDIENCE stealing OBSCENE PROFITS
Cracks in this sleazy and ethically bankrupt system are causing "additional risk" due to high transaction costs.
Eliminate actively managed funds from 401(k) plans and use Exchange Traded
Funds to "boost the net returns on participants' balances by 0.7% of assets or more."
An even better solution would be to offer participants only pre-allocated portfolios of globally diversified, low cost stock and bond index funds.
Ground-breaking court decision said retail mutual funds did NOT do any better than less expensive institutional share showing purposeful FRAUD.
Over 90% use retail Funds instead of lower cost institutional shares resulting in Losses of $Billions.
No prudent investor should invest in actively managed funds unlikely to equal benchmark returns
Index funds track the index with much lower transaction costs.
When this decision is handed down, the leak in the 401(k) gravy train will become a flood and Investors will be saved the ABUSE!
While it is probably true that considerable gouging occurs among these funds, it would have been helpful for the author to name names, so that we could look in our own portfolios to see if the dogs are there. Our company has mostly indexed funds. I've been very pleased with the returns (well, until the crisis, anyway).
Also the article assumes that people have a level of sophistication that few have. You could almost hear the snoring. Though we are probably paying more than we should, most of us are not psychologically prepared to shop for and manage investments, nor are we disciplined enough to set money aside. Therefore while on the margins there are probably better investments, that millions of Americans are investing at all is a great blessing to them and to the capital markets that can invest the money. Left to our own devices and bad habits, there would be infinitely more to complain about.
So, we've been gouged in the billions. If you calculate that out among scores if not hundreds of millions of American 401k investors, I'll bet it comes out to a few hundred a year per person, tops. So big deal. Flawed 401k may be, but it sure beats the alternatives.
And your third paragraph is right on the money but you have your conclusion wrong. Most people do lack the sophistication to make good choices about investing, be it thru the stock market, or buying $1000 gold or picking funds in their 401k. That is the essence of the problem.
There are good providers out there; it just takes some work to find them.
A well managed plan with low fees is still the BEST long term option for the vast majority of Americans. The point of this article is that there are very few plans which meet these criteria. That's not the fault of the legislation. My plan is fantastic, and could not be any less of a scam. Your statements are irresponsible.