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The $3 Trillion 401(k) Rip-Off

More than $3 trillion is invested in 401(k) plans. While Congress dithers, participants in these plans continue to get ripped off. It's a very slick con, and here's how it works.
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More than $3 trillion is invested in 401(k) plans. While Congress dithers, participants in these plans continue to get ripped off.

It's a very slick con. Here's how it works:

401(k) plans are supposed to be set up and run solely in the best interest of the plan participants. It is for this reason that ERISA, the law that governs these plans, requires the plan sponsor -- who is usually the employer -- to be a "fiduciary." This means that the plan sponsor has legal liability if the plan does not meet the high standard of loyalty to those who contribute their hard earned wages into the plan.

It's not very difficult to meet this standard. There is no difference of opinion from objective experts. All the plan sponsor has to do is limit the investment options in the plan to a small number of pre-allocated, globally diversified portfolios at varying risk levels. The portfolios should consist primarily or exclusively of low cost stock and bond index funds, passively managed funds or exchange traded funds.

This is precisely how the massive $225 billion 401(k) plan for government employees is set up. It has no "actively managed" funds where the fund manager attempts to beat an index. Financial experts from John Bogle to Jane Bryant Quinn believe this plan is a "perfect" 401(k).

According to a recent study, a plan run in this manner could add as much a $450,000 to the value of a retirement account over a thirty year period.

There are 85 billion reasons why 99% of the 401(k) plans in this country do not follow these guidelines. That's an estimate of the yearly fees and costs generated by investment managers and administrators who take a much different approach to 401(k) plans. Their approach deprives the 50 million plan participants of returns that should end up in their retirement savings accounts.

Your plan has mostly actively managed funds. The funds of one fund family predominate. It may have one or two index funds, but no more. It may have some target retirement funds, but unless these are from Vanguard, the underlying funds are actively managed.

You have a dizzying array of options. While the plan literature touts the vast number of choices, you find it very confusing and have no idea how to put together your portfolio.

These plans are not run solely in the best interest of the participants. The primary beneficiaries are the brokers, insurance companies, advisers and administrators.

Here's how they get away with it. Through slick lawyering and cleverly crafted documents, the plan advisers avoid taking fiduciary responsibility for the selection, monitoring and replacing investment options. Instead, they take the position they only "recommend" investments to the plan sponsor. When plan participants sue -- as is happening with increasing frequency -- the advisers point the finger at the plan sponsor as the sole fiduciary.

Plan sponsors can avoid this by insisting that advisers accept in writing "3(38)" ERISA responsibility. This means the advisers accept full responsibility for insuring the investment options are solely in the best interest of the plan participants.

With their neck on the line, a 3(38) ERISA fiduciary is likely to select low cost investment options similar to those in the TSP plan. Non-3(38) fiduciaries have massive financial incentives to continue the $3 trillion 401(k) rip-off.

According to industry expert Brooks Hamilton, the difference between a well run plan and yours could determine whether you "retire with dignity or despair."

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