401(k) Plans

img-401kIf you’re like most companies, your 401(k) plan was sold by a stock or life insurance broker, is administered by a big fund or insurance complex, with lots of mutual funds and annuities, with some nominal employee education along the way.

Here’s what we think is wrong with typical 401(k) plans

  1. The fees are too high
    According to the US General Accounting Office, each 1% of vendor fees reduces money at retirement by almost 20%.1 If your ATM kept $4 every time you took out a $20, you would notice, right?
  2. Employee do-it-yourself investing doesn’t work
    According to Dalbar Research, a typical investor in U.S. stock mutual funds over the past two decades earned 3.7% per year, while the market generated returns of 11.1%.2
  3. Employee education doesn’t work
    401(k) websites, brochures, and education meetings have been shown to have little effect on financial behavior. That’s because, based on our experience, employees fall into two groups, both ill served by traditional 401(k):

    1. Sophisticated Investors
      Often highly compensated, you will probably never see them at enrollment meetings. They work with their own stock broker or want access to more than the 20-30 mutual funds on a traditional 401(k) roster.
    2. Everyone Else
      Non-highly compensated care about budgeting and debt. With financial issues well beyond the scope of 401(k), they tune-out traditional employee education

1“Changes Needed to Provide 401(k) Plan Participants and the Department of Labor Better Information on Fees” United  States Government Accountability Office; November 2006

2“Quantitative Analysis of Investor Behavior 2014”, Dalbar Inc.