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Thursday, May 29, 2014

Are these 4 Things Robbing YOU of a Great 401k?

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.


4. Compliance

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.



Posted by 401K Revolt at 1:46 PM
Tuesday, May 13, 2014

Your 401k Plan is Not as Good as You Think

Every one of my friends, business associates and golf buddies who run businesses think their 401k is fine.  "I hear there are some bad plans out there, but I think ours is pretty good"!

Because benefits (including 401k) are our passion, it seems to us that the media has been making the problems with 401k plans quite clear.  But maybe we're the only ones that care, or maybe everyone thinks the articles are all about someone else's plan. Unfortunately, they're not.  The reason these publications are producing so many articles is that the problem plans are everywhere.  What kind of problems?  There are 5 basic categories:  High Cost, Low Participation, Poor Investment Choices, Harmful Participant Behavior and Compliance/Legal.  For the plans that have been sued by their participants or audited by the DOL, these problems have been acute and costly.  For everyone else?  There are more important things to worry about—or maybe not.

For today's discussion, let's just look at cost.  We don't have to generalize about plan cost, because we can simply visit the DOL website, search for the Form 5500 filings and look at them.  Typically, the plan's auditor's report is there as well.  Having done this on several dozen plans in our local sphere, we have found NO plans that are not significantly overpaying.  Over and over, we see inflated costs tied to assets.  Each time, we create a graph of what the plan costs today and what it will cost as the assets grow.  We put those numbers alongside what the plan could cost if it were managed effectively.  Here’s the chart for an actual plan.  This one is a delivery company.  But it could be a sporting goods company, an office planning/furniture company or a well-known country club—we’ve done charts for all of them and they all look the pretty much the same.


Most 401k problems are not screaming for attention—even cost!  Most plan sponsors are not writing checks to pay 401k fees, so there's no budget line item to shine a light on the high cost.  Instead, fees are quietly siphoned out of participants' accounts.

Plan sponsors tend to trust the big players on their plans—“I think our plan is pretty good!".  But the graph above is a John Hancock plan, the sporting goods company plan is "unbundled", the office services company is Fidelity and the country club is Principal.   While it's a shocker to most, these firms have actually caused the problem—and not just cost but all the others as well.

So what’s a plan sponsor to do?  Before you'd want to spend time on any alternative, you'd have to at least suspect that you're paying too much and/or getting sub-standard services.  Your plan would be the very rare exception if its metrics were good in all of the 5 problem categories mentioned above. Most plans struggle to do well in more than one or two. As your plan's fiduciary, you're compelled to be more than a little suspicious.  The evidence is easy to gather.  We'll do your chart for nothing!  Or have some fun with our plan self assessment.  Knowing where you stand could save you the cost of a lawsuit or the torture of a DOL visit.  But more likely, and infinitely more rewarding, it will make a huge difference in the future livelihood of your plan participants. 



Topics: 401k Cost

Posted by Eric Kiesshauer at 11:54 AM
Friday, May 02, 2014

Attention Plan Sponsors!

In our conversations with plan sponsors about their 401k plans, we often find folks assuming that despite any 401k industry problems, their plan is OK. 401k_Self_Assessment 

But after some research and analysis, we routinely see that poor participation, overcharging, and harmful participant behavior is the norm in most plans.  With these issues lurking, you will not have a truly successful plan.  

Unfortunately, it's not as simple as asking your advisor or broker if things are A-OK.  But that's one of the reasons we created the "401k Self Assessment".

In it, you'll answer 16 questions about your 401k plan and get a score.  Your score will give you immediate access to a guide that will outline what your score means.  

Take the assessment today, and see how your plan really stacks up!


Posted by 401K Revolt at 11:36 AM