The Biggest Problem with 401(k) Plans Today

What’s the #1 problem with 401(k) plans today? I can think of several strong contenders for that title, mainly in the small plan market, which I define as under $25 million in assets. The biggest issues include high fees, lack of good participant education, poor participation,  poor retirement readiness, too few and too similar fixed income choices, the absence of funds not strongly correlated to stocks and bonds, the difficulty adding a true real estate option (not a REIT fund), the maintenance of low performing funds in fund lineups and inertia in addressing the retirement plan.

But, the easy winner as the #1 problem is unqualified plan investment advisors.

The vast majority of smaller plans are advised by financial planners, brokers, insurance agents and bankers for whom a plan is just a tiny sideline to their core business. They often have just 1 or 2 plans they fell into because they knew the owner or senior executive. They have no training specific to retirement plans other than enough to pass a securities or insurance exam, they get no or almost no continuing education specific to qualified plans, they have little familiarity with Dept. of Labor regulations, ERISA and other legislation, recent significant court cases or best practices in plan processes, compliance and documentation.

These advisors typically take thousands of dollars each year from participant retirement balances for little to no time, service or expertise. This is especially true for bundled (single provider) plans from insurance companies and banks.

Why in the world would you hire them? More to the point, why would you keep them?

It is dangerous for plan sponsors to keep them, but alas, inertia and/or inattentiveness on the part of decision-makers  is overwhelming in the small plan market. And, it’s not just costs, the issues extend to legal liabilities and compliance issues since compliance with DOL regulations and fiduciary issues is primarily the province of the investment advisor. But, as I just pointed out, most advisors don’t know it themselves.

It is hard to overstate how widespread and serious this problem is.  To entrust the retirement of your employees to companies with increasingly expensive turnkey plans and little service or informed advice is not a good idea, no matter how many others do it. More than that, it opens you to very expensive lawsuits and civil actions.

That’s why you absolutely need an experienced advisor with strong ethics who specializes in retirement plans. That is what I do, and I would welcome a call or email from you.

If you’re one of these advisors, agents or financial planners, talk to me about me buying your plans so you can concentrate on what you do well and reduce your liability in a time of increasing specialization, lawsuits and regulatory scrutiny.

Dave Hoshour

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