5 Common Harmful Flaws in 401(k) Plans

Plus 3 Pro-Tips & a Fiduciary Pro-Tip

Originally posted by Plan Partners, creators of FeeBased401k.com & FeeBased403b.com - decades of advocating for fee transparency and eliminating conflicts of interest in retirement plan administration.

If your employer offers a Retirement Plan like a 401(k), you can easily play detective to see if it’s a good plan and how it stacks up to others, from the comfort of your computer. Simply click on the Form 5500 image or follow the link below to a public database where you can look up information about your Plan, it’ll look something like this:

You can search by company name, plan name, zip code, state, or an array of other ways. Curious about other companies plans? Look them up too. This includes research before accepting a new job.

As you skim the document you’ll likely also begin to see the amounts different people and companies make from servicing your Plan, along with the services they claim to provide. Parts of their compensation may seem illusive, but with a little detective work, you can find a lot. If you work for a small employer, they may file an abbreviated Form 5500, called a Short Form (“5500-SF”), which contains less detail but is still helpful.

Next add in the Fee Disclosure & Conflict of Interest Disclosures you receive on an annual basis. Even moderately skilled sleuths can begin figuring out how much money is leaving your Plan, what services those monies pay for, and the reasonableness of those fees. It’s common for companies to believe they understand their fees but discover hidden fees and costs upon examination. Excess fees subtract from retirement readiness. FeeBased and Plan Partners built a reputation on uncovering and renegotiating fee and services agreements. You’d be surprised how often this happens and to whom.

Key questions: what would be the value of reducing those fees; increasing the services; adding better investment options that aren’t “woke”; or all of the above. This is not only possible, it’s very likely.

Pro Tip 1: While you and your colleagues want the lowest possible fees with the best possible services, it’s fair to say that your service providers want something like the opposite (high fees with low service).

Pro Tip 2: Go here to start investigating your company. The U.S. Department of Labor hosts a library of Form 5500 filings and web searches for “Form 5500” will provide an array of resources to help interpret the form: https://www.efast.dol.gov/5500Search/

Pro Tip 3: Go visit the person who signs the Form 5500, if they’re a co-worker. Ask them questions about your Plan. Ask them to add Self-Directed Brokerage Accounts (SDBA) to your Plan so you can find investment options that aren’t “woke”. And, while you’re talking to them, if you want to go above and beyond, offer this Pro-Tip:

• Fiduciary Pro Tip: Starting immediately, have them sign all documents relating to the Plan with their name and title. Have them change their job description with Human Resources to include “certain administrative duties relating to the ongoing operations of the company retirement plan offering.” They’ll thank you later. This has to do with a common practice of establishing Fiduciary Lines of Authority. Taking this step clearly illustrates that the person signing such documents is NOT doing so personally, but rather as a part of their job. Fiduciaries typically do this, but employees at companies tapped to help with the 401(k) Plan are typically under-trained and are often unaware that they’re likely performing fiduciary duties. Have the Human Resources Department add the above description to the job functions of whoever holds that title at the company (Director of Benefits, HR Director, or whatever), don’t tie it to any person by name. This way, in the event of an audit or examination (and, heaven forbid, an error), it’s the office that has signed the document, not an individual.

  • It’s common practice for employers to find a few people in the company to help with the administration of the 401(k) Plan, usually the CFO, HR Director, Benefits Manager, or a few others. What these people don’t know can hurt them… and you. Thoughtfully designing a Plan with clear delineation of roles and responsibilities can help the company and those people. Thoughtfully designing a Plan that keeps various vendors in check can help you, the employee.

Want to know more about this? Join the chat.

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Common Harmful Flaws in 401(k) Plans:

1. High internal plan fees.

   1. The greatest failure of U.S. workplace retirement plans is arguably Fee & Services negotiations. High fees with low service lead directly to savings shortfalls. High fees coupled with inadequate services plague most U.S. retirement plans, in our examined estimation. Better options are under-utilized due to (see #2 below)

      

      Plan fees as reported publicly via I.R.S. Form 5500. Note e, f, g, & h, these can be incredibly difficult to decipher. Source: Department of Labor Form 5500. If you look up your plan (it’s a public record) and find huge Direct Compensation (d) PLUS complex formulas for Indirect Compensation (e & f), with very few Services (b), and maybe some confusing Party-in-Interest issues, consider making fundamental changes, or expect to have to work longer to make up for the fees.

   Fix: Find a dedicated Plan Advisor without conflicts of interest, their job is to protect you from the fees, charges, commissions, performance issues, and dismal services.

2. Putting the wrong people in charge.

   1. Globalist Banks, Insurance Companies, and Wall Street are not our friends in the battle to build a sustaining income for America’s workers. Hiring them to supervise themselves is a fool’s errand, like trying to get healthier by hiring a pharmaceutical company. For Plan Administration, work only with disinterested parties.

   2. Examples of people who do not belong in your Board Room navigating retirement plan issues: Personal Financial Planners, Life & Annuity Agents, Financial Advisors, Insurance Agents, Bank Representatives, Investment Managers.

Fix: If your workplace retirement Plan does seek outside help, find a dedicated Plan Advisor, preferably one without conflicts of interest.

3. Conflicts of Interest.

   1. Conflicts of interest and self-dealing had gotten so prevalent that by 2012 new regulations were needed requiring Plan Advisors to disclose both their means of compensation and their conflicts of interest. This was meant to help shore-up the woeful under-savings of America’s workforce by right-sizing the charges associated with workplace retirement plans. Those regulations, and the subsequent adjustments to them, were meant to clear a path toward better service at lower cost. Unfortunately, what resulted is frequently a complex maze of fee formulas, lengthy disclaimers, and carve-outs for exempted service providers.

Fix: Find a dedicated Plan Advisor without conflicts of interest. Their job is to protect you from the fees, charges, commissions, performance issues, and dismal services.

4. Bad Plan design.

   1. Most people don’t know that there are thousands of ways of crafting a workplace retirement plan, often with much better results for all, and sometimes at lower cost. Conflicted advisors probably doesn’t know this, won’t arrange it because it might impact their compensation, and may be reluctant to bring in competent professionals for fear of losing commissions.

Fix: Find a dedicated Plan Advisor without conflicts of interest, their job is to protect you from the fees, charges, commissions, performance issues, and dismal services.

5. Commissions Conflict Conundrum.

   1. The lure of extra fees and commissions frequently encourages sales agents to use certain providers, add services, and recommend products. Fees & commissions make Plan costs higher, reducing compound interest, which means employees will have to work longer before being able to retire, all other factors being equal.

   2. In order to hide high Plan fees, some sales agents resort to filling plans with ultra-low-cost investment options, which often results in lackluster herd-investing and overwhelmingly far-Left ultra-woke investing.

Fix: Find a dedicated Plan Advisor without conflicts of interest, their job is to protect you from the fees, charges, commissions, performance issues, and dismal services.