The 401(k) retirement complex: Retooling Americans’ nest egg

Is there a retirement crisis in America? Yes, but it’s not the one most people talk about. Much of the discussion and debate to date has centered on whether Americans have saved, are saving and will save enough money to secure even a financially adequate retirement — let alone a comfortable one — especially given longer life expectancies.

That remains a worthwhile topic of discussion. But people are saving, and in record amounts. Combined, 401(k) and IRA assets have reached over $10.2 trillion. While Americans could always save more, or start earlier, that’s not the main thing we should worry about. There is a separate problem.

This problem resides in what I call the “401(k) retirement complex.”

CONVERGENCE OF INTERESTS

Certainly, many people and firms work hard to protect the retirement assets of their clients or employees. But in the nearly four decades since 401(k) plans were first introduced, there has been what could be called a convergence of interests within the 401(k) retirement complex that has arguably damaged millions of Americans trying to save for retirement.

This has not always been intentional. Some of these acts were committed by people simply asleep at the switch who had not taken the time to become fully informed about financial services industry practices or to carefully monitor fees.

In other cases, it was done with knowledge from those doing it, but who were acting on the temptation to serve the interest of the employer or service providers rather than the employee.

Still others knew exactly what they were doing and that their conduct breached the Department of Labor laws designed to protect 401(k) plan participants. But they did it anyway.

Whether a result of being asleep at the switch or done intentionally, the damage first begins with charging 401(k) plan participants what could be considered excessive fees by any reasonable measure. Those fees are charged by asset managers for access to mutual fund strategies, as well as by service providers. In many plans, the fees have been needlessly high for decades, and there is plenty of evidence that even a small increase in fees significantly reduces asset levels by the time of retirement.

That is directly related to the need for greater transparency and simplicity in explaining plan fees: what’s being charged, what services are being provided and who gets the money.

The 401(k) retirement complex is not necessarily hiding anything, but it’s not exactly user friendly, either. And it just so happens that the complexity and opaqueness surrounding fee disclosures benefit the 401(k) retirement complex at the cost of savers.

Second, the 401(k) apparatus has overcomplicated retirement portfolio strategy (with higher fee levels to go along with the increased confusion). Many 401(k) lineups are crammed with needless investment options — just about every flavor of actively managed equity and bond strategy under the sun.

Plan participants don’t have the investment expertise to know which options are most advantageous and why. And studies have shown that an excess of investment choices negatively impacts employees’ ability to make informed decisions.

At the same time, many of these plans charge needlessly high fees for performance results that are not achieved.

Third, participants sometimes are put into investment funds charging retail share-class fees when the plans they are a part of are, in aggregate, large enough to entitle them to lower-cost, institutional-share-class funds. Participants in large 401(k) plans should, in general, not be paying retail.

Fourth, and most egregious, are the conflicts of interest that have become embedded in some plans. The number and variety of these conflicts add insult to injury. They range from using employees’ retirement savings to “seed” proprietary businesses and funds, to subsidizing employer expenses through workers’ 401(k) assets.

My point is not to demonize anyone. American workers need their employers to provide 401(k) plans that can help meet their retirement goals. They need their employers to help educate them to make good investment choices. Service providers also are vital to a well-functioning system.

But employees also need to have clear choices that enable them to invest their 401(k) savings wisely and to achieve the returns that will generate the required retirement income — all at a reasonable fee level.

The 401(k) retirement complex needs to retool itself so that it works primarily in the best interests of American savers. That has yet to happen, and that is the real crisis we face.

Jerry Schlichter is founding and managing partner of the law firm of Schlichter Bogard & Denton, based in St. Louis.

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