It’s Time for 401k Plan Sponsors to Declare War on Fees

The overcharging in 401k plans continues to 

be trumpeted daily in every media imaginable.  The problem is real and widely-documented, yet the depth of it is typically understated.  Now that “providers” (parasites may be the perfect word) are required to disclose cost to plan sponsors (and they to plan participants), we expected widespread outrage, closely followed by a major shake-up and industry restructuring.   Obviously, it didn’t work out that way!  We should have seen it not coming.  Why? 

• We should have known the disclosures would be crafted to be indecipherable.
• We should have realized that the information would come with no real context.
• We should have anticipated that any comparisons would use data and benchmarks from  a universe of plans with exorbitant cost—making it easy to conclude that your own costs are OK.

If you’re a plan sponsor or fiduciary, you should be angry that the 401k folks you rely on are not helping you see your plan costs more clearly.  But it’s really much worse than that.  Your plan costs are being pro-actively concealed.  They don’t want you to know.

 Plan sponsors tend to rely on their “advisors” to make sure their costs are reasonable, because identifying and quantifying 401k plan fees is complicated, even for senior HR folks and CFOs.    Participants rely on their employer for due diligence.  That means they too are reliant on the plan “advisor”. 
  

This is a serious problem for sponsor and participant alike, because most advisors and the funds they recommend are literally the source of the cost problem.  They are the proverbial fox.  Sponsors and participants are the chickens. 

This obviously is a very strong indictment—and to be fair, it’s not universally true.  But it’s not hyperbole either.  In fact, you’re best-served to assume it is true and insist to be convinced otherwise.  Your broker, insurance company, actively-managed funds, investment firm—each and every one of them—is not interested in helping you understand your cost.  And in this broken industry, why would they?  They are the ones who profit at your (and your participants’) expense when the costs remain hidden and unaddressed.

So is it really necessary to cry, “revolt!”?  It’s just a 401k plan for goodness sake!   Maserati's and rooms at the Ritz are expensive too!  But consider this:  you can readily learn what those cost and judge the value for yourself.  

Neither sponsors nor participants can judge the value of a 401k plan when they can’t see every component of the cost.  And this is critical to folks’ well-being in retirement; a fancy room for a night or two is not.  Charging a lot is one thing but purposeful concealment is quite another.  Therein lies the villainy and that’s why revolt is truly the right word. 

Over our next several blogs, we are going to break down the expense components in a 401k and show you where the villainy lives.  Stay tuned; you’re going to be amazed.  And if you count your advisor as your advocate, or even your friend, be prepared to be disappointed in him or her as well.

Playing the Lottery: A Winning Fiduciary Strategy?

About 85% of 401k plan assets are still in actively
managed funds.  What could justify this?!

If you're a fiduciary, the sooner you check these facts and take action, the safer you'll be.  Any debate over the effectiveness of active fund managers and their ability to gain more reliable returns than passive (index) funds has long been settled.  Judging by the increasing number of participant-brought lawsuits, the folks to whom the money belongs seem to be catching on quicker than their plan stewards!

There have been myriad studies employing a variety of evaluation methods and the results are unanimous and concrete: Active managers, whether by skill or luck, cannot beat comparable passive fund results with any regularity whatsoever. If a plan fiduciary opts to utilize actively-managed funds, he stacks the odds overwhelmingly against himself and his trusting participants.  He may want to consider the lottery instead.

The odds of winning a coin toss are 50/50. The odds of winning in Las Vegas are a bit less than that. The odds of an active manager beating a passive (index) manager are less than 10%. Let's say that's off by a factor of 3. Why would you ever do it? 

It’s likely there is a skillful (or lucky) active manager or two out there that has a track record that beat the index over a 10-year span. But shall we guess what the odds are that you now (or will) work with him? Before you try to find him, shall we guess the odds of him repeating the performance? Buy a lottery ticket instead. Your odds are pretty much the same, but at least the cost is very low and utterly transparent! And should you actually win the lottery, the payoff will be huge -- not some tiny (albeit miraculous) margin of difference your active manager achieved.