We routinely find that plan sponsors think their 401k plan is pretty good. We also routinely find that there are a lot of things wrong with almost all plans we look at. Here are the 4 most common problems you may not think you have.
1. Excessive Cost - Hidden Fees
Fee disclosures notwithstanding, few plan sponsors or participants can even ballpark their actual dollar cost. Fees are siphoned off the assets and investment returns of participants in a manner not visible to anyone.Most of the cost of 401k plans is borne by participants, with some plan sponsors funding a small portion of the cost. There's nothing inherently wrong with this.
Most plans/participants are paying between 3x and 6x what they should be (assuming same/better service). Expressed as industry jargon, that's an overcharge of 40 to 120 "basis points". Expressed as a percentage of assets, the overcharge is .4% to 1.2%. Expressed in real dollars, if a participant has $50,000 in his account, saves $200/month, and earns 8% in his plan, in 30 years, he would have $845,000.
- If he pays .4% in excessive fees, he'll only accumulate $760,000 - a loss of $85,000
- If he pays .8% in excessive fees, he'll only accumulate $685,000 - a loss of $160,000
- If he pays 1.2% in excessive fees, he'll only accumulate $617,000 - a loss of $225,000
Nearly all plans assess fees as a percentage of assets, which means costs compound as assets grow.
2. Poor Participation and Savings Rates
Plan participation varies widely but the average is about 65%. How many of your employees are sitting on the sidelines with no retirement plan? Don't you want them all in? Of those participating, how many are saving enough to earn the plan's maximum match? How many are saving more than 5% of their pay? Poor participation (in its several forms) is the principal cause of failed discrimination tests. It's also the main reason retirement will turn out to be either a myth, or a very unhappy place for most employees.
3. Wrong Investments/Bad Investment Behavior
Research shows that would-be participants are repelled by investments, investment jargon and investment education. Confusion and lack of trust prevail. Investment education has never worked.
Most plans are comprised of actively-managed mutual funds (and target date funds comprised of the same). Far more expensive than index funds, actively-managed funds balloon cost and literally strip value from participant accounts. Study after study shows index funds outperform actively-managed funds 80+% of the time. There are no studies that claim actively-managed funds outperform index funds.
Many participants invest too conservatively. Worse, others invest too aggressively and then "run" when the market goes down, forfeiting any chance of recovery.
The majority of compliance issues stem from poor participation and high cost. Nearly all participant-brought lawsuits are over cost or the absence of index funds (returns/cost). In other words, the same problem areas we find in just about every plan we review.
You may not think your plan has a problem, but we’d be willing to bet one or all of these things are robbing you of a truly successful 401k plan. Click the button below to learn more.