Et tu my trusted corporate employer? I thought we were "family."
You encouraged me to work hard for the company. I did. In exchange, you extolled the virtues of my 401(k) Plan.
Our HR Department explained why enrollment in the Plan was such a great idea. After all, you matched 50 percent of my contribution.
And here is what you told me about the fund choices in the Plan: There are thousands of them. All brand names. Some of them were supposed to have the best track records in the business. What a deal! How could I go wrong? I couldn't wait to sign up.
Now I feel betrayed. Here is what you never told me:
You don't pay anything for the cost of administering the Plan.
Why? Because the fund family that "advises" the Plan gets to pick the funds that go into the Plan. And what funds do they pick? Mainly ones managed by their own company (surprise!) and others that pay it a "revenue sharing" fee.
Come on. Even you can figure out that this process is geared to generate fees and not to pick the "best" funds for us to invest in.
What do these funds have in common? High expense ratios, which means employees get stuck with really expensive funds.
Why are there few, if any, low cost index funds in our Plan? Can I take a guess? You would have to actually pay a fee for the record keeping costs (which would be tax deductible).
Bill Bernstein, the author of The Intelligent Asset Allocator and The Four Pillars of Investing said that "[T]he typical 401(k) Plan is an absurdly expensive vehicle with fees approaching 3 percent, ...Add commissions and other costs from frenetic trading at the funds. The typical fund company services participants in the same way that Baby Face Nelson serviced banks."
This sad description aptly describes our 401(k) Plan.
Just how difficult would it be for you to have a model 401(k) Plan? One that would really benefit employees like me (and you, I might add)? Not very.
Just give us four pre-allocated portfolios to choose from. Low risk, medium low risk, medium high risk and high risk. All of the funds in these pre-allocated portfolios would be index funds from well known fund families like Vanguard, Fidelity or T. Rowe Price. You could also consider using Exchange Traded Funds. If you wanted to go all out and really set an example, you could use funds passively managed by Dimensional Fund Advisors.
Historically, everyone but you seems to know that these portfolios will outperform the high expense ratio, actively managed, funds that populate our Plan. Again, listen to Bill Bernstein:
"For 1995-1998, the annualized returns of the 401(k) Plans at Morningstar, Prudential, and Hewitt Associates were 13.5 percent, 10.5 percent, and 11.8 percent, respectively, versus a 21.2 percent return for the global 70/30 mix. If employees at the nation's most sophisticated financial companies can't get it right, what chance do folks on the assembly line at Ford have?"
I can answer that question.
No chance.
I know. With your match, I am still probably better off than I would be if I didn't invest in the Plan. But think how much more money you and I would end up with if we had a decent Plan. One that had low fees. A few simple choices of portfolios. No conflicts of interest between you, us and the advisor to the Plan. After all, for most of us, the Plan is our only source of retirement savings.
I read that you are supposed to have a "fiduciary duty" to employees like me. I looked that up. It means that you are expected to act solely in our best interests.
Let's see. You get paid off by the advisor who gets the Plan business. The advisor gets paid off by the funds included in the Plan. The advisor engages in self-dealing. The funds in the Plan under-perform the markets. We get stuck with the tab.
This does not make you look like you are much of a "fiduciary."
Brutus would be proud.