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.