Let’s declare 2015 the year we officially recognize 401(k) plans as a failed experiment in retirement planning. And let’s give some credit for that to plaintiffs’ attorneys, the Supreme Court and the Department of Labor.
To be fair, lots of credit also goes to the CFOs and HR professionals who cut costs on 401(k) plans to bare bones and failed to educate employees about how to use their investment options. Let’s not forget the fund companies that enjoyed years of large fees without scrutiny, nor third-party administrators who used higher internal expenses to rebate the company’s costs back to the employer. Financial advisors who pocketed 12b-1 fees and other forms of trailing commissions can’t be completely overlooked, either.
Imagine how recent lawsuits would have gone if the 401(k)s had done a good job. What if the plaintiffs had sued about plan expenses and the companies’ response had been “We use those fees to cover advice services to all plan participants, with advisors who come on-site once a week”? I did this in the early 2000s for a $100 million plan. We gave the company relief from fiduciary responsibility. We were on-site, did financial plans, asset allocation, explained rebalancing—at no additional cost to the plan participants. We were paid with 12b-1 fees, which we split with Putnam, the plan provider—we took 12.5 basis points and didn’t feel underpaid.
So what’s the problem? Maybe it isn’t the fees workers pay but that they don’t get the service they deserve.
The 401(k) has become a feeding trough for financial institutions and service providers that routinely rip off participants. Why? Not because of the fees, but because participants don’t know how to use them—and no one is willing to take responsibility for guidance.
Just this year we have the following facts to ponder:
Participants left $24 billion in company matching funds unused because they didn’t save enough to claim the full match.
In 2014, only 10.5% of plan participants changed the asset allocation of their account balances, and just 6.6% changed the asset allocation of their contributions.
Approximately 21% of savers who can borrow from their 401(k) plan have outstanding loans—so they’re using their retirement funds as a piggy bank.
Roughly two-thirds of investors think they pay no fees for their investments, or have no idea how or how much they pay.
At the same time, 53% of households are at risk of being unable to maintain their standard of living in retirement.
What if participants in large plans are paying too little to have their assets managed and, therefore, are not getting the help they need? If you doubt this, just grab a copy of the yearly report from AON Hewitt—or any retirement plan consultant—about participant behavior in the plans they administer. This is not a survey; it’s a report on the millions of accounts AON Hewitt administers and what their owners do or don’t do with their funds when they get no real input or advice.
It’s not a pretty picture. Inertia rules. Did none of these employees have any reason to change their investment choices? Did none of them get a few years closer to retirement? Get divorced? Have children? Did the allocation they picked five years ago not need rebalancing after the supersonic run-up in large U.S. stocks?
More troubling, AON’s clients—the plan participants surveyed for the report—make up approximately half of the Fortune 250. Assume for a minute these companies have their pick of the smartest people around, and pay better compensation and benefits than many other firms. If these workers can’t get investing right, what does that say for the rest of us?