No Good Deed Goes Unpunished: The High Price Of Today's Broken 401(k)

February 10, 2014 | | Forbes |

If the road to hell is paved with good intentions, perhaps the same could be said about many of today’s 401K plans.  Employers craft benefit packages with the best of intentions, yet, there’s a good chance you may be administering or participating in a retirement plan not in compliance with new Employee Retirement Income Security Act of 1974 (ERISA) regulations.  Last year nearly 75% of plans audited by the Department of Labor (DOL) were either fined, received penalties or had to make reimbursements for errors.  If your 401K plan were audited today, would it pass muster?  Or, would your company face steep fines and possible criminal indictment?

Every employer, also called the plan sponsor, needs a thorough review of their 401K plan to reduce any chances of unnecessary litigation, keep unscrupulous financial services firms out of participants’ pocketbooks, and be up-to-date with current regulations. It is advisable for plan sponsors; particularly those with small plans, (defined as plans with less than 100 participants) to have their 401K professionally benchmarked to reveal any hidden fees, expenses, and liabilities within it.  Small plans may carry fees as high as 3% per year.  According to Demos.org, over a participant’s lifetime, these fees can rob investors of nearly 35% of their total returns.  Should financial advisors, who put up no capital and take no risks, take over 1/3 of participants’ returns when they put up all of the capital and take on all of the risk? [...]

Fast-forward to last year when EBSA released a final rule for increased transparency about fees in 401K plans.  While the news didn’t receive much fanfare, ERISA mandates state that fees paid both at the participant level and the plan level be “usual and customary” for what the market dictates.  If your plan was compliant five years ago, it’s not necessarily compliant today; there is a high likelihood it isn’t.  Robert Hiltonsmith’s research in The Retirement Drain: The Hidden and Excessive Costs of 401(k)s, showed excess fees robbing investors of as much as 33% of their returns.  According to a recent piece in Fortune, excessive fees accumulated over 30 years can erode as much as 37% of returns.  Demos, a New York-based think tank, concluded that an ordinary American household will spend nearly $155K in 401(K) fees over their lifetime.

Read the report: The Retirement Savings Drain: Hidden & Excessive Costs of 401(k)s