Ignore Retirement Experts

A recent report on the problems with our 401(k) retirement plan shows why anyone claiming to be a retirement expert in the public policy arena should be ignored.

A liberal policy advocacy group named Demos recently published a report titled “The Retirement Savings Drain” which rehashes old complaints about 401(k) plans, over states costs, and offers a government plan as a solution.

Chief among the complaints by Demos are that current 401(k) plans are full of excessive fees, and those fees are hidden from employees. Interestingly, 401(k) fee disclosure has been planned to be rolled out in 2012 for some time, making the timing of this report somewhat odd.

The paper begins by listing all of the costs of funds (and uses assumptions on a higher end than most plans of larger employers), and boldly makes the claim that the ‘true’ costs of a 401(k) plan are somewhere in the realm of 34% (34% apparently is the number arrived at by taking assumed high expenses, and applying those fees against investment earnings, as opposed to investment balances).

The report lists four reasons for the problem of high fees with 401(k) plans:

  1. Complexity

  2. Employers lack of knowledge

  3. Employees lack of knowledge

  4. Inefficient market structure

While all of the above may have some truth, what Demos fails to acknowledge is that all four items are due to the lack of a free market in 401(k) plans, as well as burdensome rules and penalties on employers who choose to offer plans.

Instead of allowing for more choice and removing some of the regulations on employers, Demos’ solution is to use government force to manage all retirement accounts in pooled accounts. A quick goggle search on pension scandals should say enough about the likelihood that costs will be lower under this approach.

Demos also believes individual investors need access to high-cost products like hedge-funds and private equity (though most 401(k) investors on their own are not permitted by law to invest in these products); they reject the idea of IRA accounts which would provide an escape from poor plans (Demos makes an absurd claim that such plans would “have even higher fees than their employer-based counterparts”); and they liberally use the life insurance buzzword of a need to provide ‘guaranteed income.’

The problem with our 401(k) system (as I’ve written about in the past) is that our current system allows for a monopoly over the accounts and assets unlike what we see in the 403(b) markets, and with other small businesses plans which adapt SEP and SIMPLE accounts. In those plans employees often have more rights to take control of their account, seek (and pay for) unbiased education, and plan across all of their accounts towards their personal financial goals.

Eliminate other high-cost government requirements such as determining if high wage earners may have to be inconvenienced by not adding another $1,000-$5,000 dollars to a plan, and you eliminate problems 1, 3, 4.

The problem isn’t lack of knowledge on the part of employers. Employers, like anyone, respond to incentives. In the case of the 401(k) it’s the incentive to not be sued for offering what Demos does not understand is an employee benefit, not a right.

I recently met with a small business client who moved their plan from a relatively low-fee, no-load mutual fund plan, to a broker-sold plan with higher costing fund options. The reason? As their small company grew, the low-cost sponsor was not providing reports on the performance of the funds. A simple thing, and while the cost to the employees may have unnecessarily increased with the addition of higher cost funds, their job safety increased under the new plan with a plan sponsor that responded to the needs of the employer to help them choose appropriate options.

Fix the employer incentives, allow employees the freedom to control their funds and access to pay for advice from their accounts like all other plans, and the 401(k) could be remade from an account that benefits the fund industry, to one that meets every workers individual and personal goals. Competition and access are the real answers to 401(k) reform, not another failed government mandated savings plan.

The preceding blog was originally published by Forbes. To view the original blog please visit our blog at Forbes. http://www.forbes.com/sites/feeonlyplanner/


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Detroit, Ann Arbor, and online fee-only, fiduciary financial advisor blog / podcast on retirement, investments, economy, taxes, 401k, 403b, Roth, IRAs