401k plans were developed in the late 70s/early 80s – about the same time as PacMan and the Commodore 64 computer. While we’ve seen huge leaps in computer technology most 401k plans have not evolved. So, it shouldn’t be a surprise that Ted Benna, the father of the 401k, feels his creation has become a “monster”, and economist and professor Teresa Ghilarducci believes that 401ks have “failed” the people they are supposed to help the most.
You decided to offer a 401k plan because you wanted to offer competitive benefits and help your employees save effectively for retirement. As an employer, you’re investing time and money in setup and administration and want it to be a success. How come these economists are saying it’s a failure?
If you’re like most plan sponsors (aka employers) you did or will do some legwork before deciding which 401k plan to offer. Perhaps you had a few salespeople talk to you about the options that were available. There are certainly enough plans out there. One informed source told us that a “large payroll company starts up 12,000 plans per year and closes about 8,000”. Maybe one option was from an insurance company or from one of the biggies – like Fidelity. Fidelity manages more retirement money than any other entity aside from Social Security . So, you’d think you’d be in good shape with Fidelity.
But if you don’t direct them carefully any 401k company can put expensive funds into the plan when less expensive ones are available. Judges don’t like that, and neither do employees as a recent lawsuit revealed. I have direct experience with a plan that was notified about this same problem about six months ago. They still haven’t done anything.
ERISA, the law that covers 401k plans, didn’t ignore this potential conflict. In fact, ERISA requires employers to hire an expert if the employer isn’t an expert at investing. Of course, that’s exactly why employers hire one of the biggies… but, many of those biggies still haven’t agreed to act in the best interest of the employees, as a fiduciary.
We’ve got a great tool to help determine if your 401k plan is following the all rules and working in the best interest of your employees, not the mutual fund company. If you’re an employer or an employee – call us or email to find out more about how your 401k plan measures up. And, what to do about it if your plan doesn’t.
