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Are 401(k) Plans Defective or a Great Hope?

Employer-sponsored plans such as 401(k)s are workers' best hope for a secure retirement. Critics of the 401(k) system contend that the plans weren't designed to be the foundation of a secure retirement and should be scrapped in favor of something tailor-made, while supporters of the system say it just needs fine-tuning. While regulators, academics and the financial industry tussle over the best way to get everyone to retirement, investors have to keep saving as much as possible and, just as importantly, keep expenses low.

What's wrong with 401(k)s

Fees make 401(k) plans less efficient investment plans than they otherwise would be. Paying just a handful of basis points in fees over the span of a career can equate to thousands of dollars less at retirement. Paying a full extra percentage point in fees can mean tens of thousands of dollars less at retirement, reducing your retirement account by as much as 28 percent, according to the Department of Labor.

"Fees are just the most problematic thing out there," says Robert Hiltonsmith, a policy analyst with Demos, a research and policy organization. Participants are on the hook for fees associated with the investments they choose, but they also likely get dinged for the administrative costs of running the plan.

That comes as an unpleasant surprise for many. A recent regulation requires that plan providers tell participants how much they are paying in fees, but it hasn't made much difference, according to Hiltonsmith.[...]

The Department of Labor is expected to release a proposed rule extending the definition of who is a fiduciary to retirement plans. That could really help, says Hiltonsmith.

"Both brokers and investment advisers all the way up to the plan custodians are incentivized to pick higher-fee funds. Their priority is to maximize profits. Often custodians will pick funds that give them the highest revenue sharing, or financial advisers get some commissions from selling funds. If we turn that around, I think that could have a large effect on fees," he says.