in Debate

Is a 401k Worth for Your Retirement? Can It Sink Retirees?

Most investment advisors have always considered 401(k) plans to be a retirement investment plan that is far superior to any other form of investment, with generous employer matching contributions alone putting plan participants far ahead. This stance could not have been assailed fifteen years ago. However, times have changed, and within that same fifteen years, investors as well as 401(k) participants have been walloped by not one, but two meltdowns that have shrunk financial assets to an unbearable level. It is only fair to ask whether 401(k) plans can sink retirees, and if so, how to adjust strategies accordingly.

The latest issue to surface is how 401(k) fees can affect the overall health of 401(k) plans.

A recent call to arms came from Robert Hiltonsmith, policy analyst at New York based Demos, a public policy research group, who claims that over forty years, a two wage earner household in the median income group would pay $154,794 in total 401(k) fees, constituting a whopping 30.3% of the ending retirement balance of $509,644. The $154,794 hence becomes forfeited returns.

Brian Reid, Chief Economist of the Investment Company Institute, a trade group, disputed those numbers and pegged the median annual 401(k) fees at $496, or slightly less than $20,000 over forty years.

The Demos assessment is suggesting that 401(k) plans can sink retirees, due to greedy fee gouging, whereas the investment industry is saying not even close.

So, is it true that 401(k) plans can sink retirees? A well informed observer would probably take the position that the real truth most likely lies somewhere in between the two opposing assessments.

Nonetheless, there are disturbing facts coming from another source.

The Government Accountability Office released a report in late May, 2012 that surveyed 1,000 401(k) plan sponsoring companies, with 365 responding, and these are the findings:

  • In numerous instances, sponsors of both large and small plans were not aware or grossly underestimated the fees that are deducted from the account of participants, such as transaction and wrap fees, citing the complexity of fee arrangements.
  • Record keeping fees are generally expressed as a percentage of fund assets, ranging from 0.01% to 3.7%, but as assets increase, the amount also increases, even as the level of service remains the same.
  • In 73% of 401(k) plans, participants paid 100% of transaction costs and are billed directly.
  • 85% of plans hire investment consultants whose consulting and advisory fees of 0.01% to 3.4% are paid by 77% of participants.
  • Revenue sharing is an obscure concept not understood by most sponsors, leading some to pay high fees under this arrangement then passing them on to participants.
  • Small plans with under 50 participants suffered the highest record keeping fees, at 1.33%, compared to an average of 0.15% for plans with more than 500 participants.

Of major concern is the fact that plan sponsors are more concerned about how much they have to pay and much less concerned about how much participants have to pay, although resources are available for comparison purposes, such as the U.S. Department of Labor, or Morningstar and Brightscope, which provide 401(k) fee data.

Help is on the way with the U.S. Labor Department requiring extensive fee disclosure starting on July 1, 2012; however, it is highly advisable for 401(k) plan participants to do their own research by scrutinizing the Account Statement, Summary Plan Description, and the plan’s Annual Report.

The sad truth is, a good portion of participants do not have any control over the administration of 401(k) plans, nor can they have any say over what fees they are responsible for.

The only option that participants have is to only contribute enough to secure matching employer contributions, if such are offered, and put the rest into IRAs or Roth IRAs as applicable, possibly using index funds with the lowest possible costs as the investment vehicle of choice.

Avoid the middleman.

With the two meltdowns that have occurred in the past 15 years significantly shrinking assets and possibly still maintaining that trend into the future, all those extraneous fees can further reduce the balance, and the possibility that 401(k) plans can sink retirees is starting to become an enduring reality.

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