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

[Winehole23]

So how did this all start—and how did it spin out of control? The 401K was first created in the late 1970’s as the U.S. government tried to limit the amount of cash-deferred compensation plans being offered. An enterprising business consultant to Johnson & Johnson discovered a loop hole which allowed highly compensated executives and their employees to save more of their pre-tax dollars for retirement. And the 401K was born. Today’s plans can be relatively complex, however, the original plans were straightforward and offered only two investment options: a guaranteed fund and a single equity mutual fund. As executives wanted to add more flavors to the menu, these options got more complicated; two options became fifteen; which in turn became thousands. As the menu of investment options grew, an opportunity for middlemen to get involved at the expense of the American worker through layer upon layer of fees presented itself. Institutions offering small plans, largely brokerage firms and insurance companies, knew that plan sponsors would be unlikely to realize their plan participants were bearing unnecessary expenses or that enterprising salesmen had created revenue streams in excess of their annual advisory fee by selecting investment options laden with upfront sales charges, mark-ups, and recurring fees.


Fast-forward to last year when EBSA released a final rule for increased transparency about fees in 401K plans (http://www.dol.gov/ebsa/newsroom/fsFYagencyresults.html). 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 (http://finance.fortune.cnn.com/2012/06/25/retirement-guide-401k-fees/), 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 (http://www.demos.org/news/401k-expenses-still-pernicious-rip).

http://www.forbes.com/sites/brianluster/2014/02/11/no-good-deed-goes-unpunished-the-high-price-of-todays-broken-401k/

[Winehole23]

Standards governing brokers and advisers are a longstanding issue. The fiduciary standard requires advisers to adhere to a higher ethical standard when making investment decisions for clients. The suitability rule allows brokers to recommend investments they think are suitable, even if their firm created the product and will profit more from the client buying it over a similar product.

This year the Labor Department is expected to rule on whether a fiduciary standard needs to be in place for the management of 401(k) (http://topics.nytimes.com/your-money/retirement/401ks-and-similar-plans/index.html?inline=nyt-classifier) plans and other investment vehicles that come under its purview. The ruling is expected to make anyone who offers advice on these plans adhere to the fiduciary standard.


But Knut A. Rostad, regulatory and compliance officer at Rembert Pendleton Jackson Investment Advisors and president of the Institute for the Fiduciary Standard, said how transformative the ruling would be would depend on how advice and education were defined. A firm calling its advice education might not be bound by the fiduciary standard.


“Many brokers work very hard underneath the headlights to provide a fiduciary level of service, even though they’re not required to,” Mr. Rostad said. “But there are many who don’t do that. From a regulatory point of view there is no way for a broker to be a fiduciary for retirement (http://topics.nytimes.com/your-money/retirement/index.html?inline=nyt-classifier) assets but not everything else.”


This is where any ruling from the Securities and Exchange Commission would have a broader impact.


Advisers like Mr. Rostad worry that an S.E.C. requirement for brokers to be fiduciaries could be so vague it would be worse than no requirement at all.


“Virtually overnight every single financial investment intermediary would call themselves a fiduciary, but they would be working under the same rules that they are now,” he said.

http://www.nytimes.com/2014/02/11/your-money/whats-in-store-for-2014-heres-what-to-watch.html?_r=0

[RandomGuy]

http://www.forbes.com/sites/brianluster/2014/02/11/no-good-deed-goes-unpunished-the-high-price-of-todays-broken-401k/

Eyup.

They will nickle and dime you to death, while claiming that they need the money for the professional managers.

Fuck that.

A roth IRA, self-managed that sticks to simple index funds with little to no load will let you keep a lot more of your money.

THe financial system in this country is corrupt far beyond what most, yourself aside, seem to realize.

[DarrinS]

It's probably a good idea to have a Roth and a 401(k). I'm pretty happy with the performance of my 401(k) over the past 4 years. Thanks, Obama.

[Winehole23]

fiduciary rule to go into effect:


Why did the Labor Department, which sets the rules governing retirement accounts, shift to the so-called fiduciary standard? One reason is that the U.S. is poised for a financial retirement crisis. The math is inescapable: We have failed individually and collectively to save enough money for our golden years. This will be a huge issue during the next few decades.


The problem with the present system is that advisers don't have to put client's interest first. They are perfectly free to recommend investments that pay them the highest commissions provided they are considered suitable for the investor. By some estimates, this deprives (https://www.whitehouse.gov/the-press-office/2016/04/06/fact-sheet-middle-class-economics-strengthening-retirement-security-0) retirement savers of as much as $17 billion a year. And given the scale of the gap between how much America and Americans have in retirement savings versus how much retirees will need to survive, every little bit helps.

Of course, the $17 billion is money that isn’t going to the financial industry, which goes a long way toward explaining the fervor of the opposition (http://thefiduciarystandard.org/images/Aug14CommentLetterReviewFinal.pdf).


But with Trump trailing by a wide margin in the polls, you might wonder why bring this up now? For the answer to that question, let's turn to what Scaramucci was quoted as saying at the Securities Enforcement Forum last week in Washington -- that the rule "could be the dumbest decision to come out of the U.S. government in the last 50 to 60 years…It's about like the Dred Scott decision."

https://www.bloomberg.com/view/articles/2016-10-19/doing-what-s-best-for-retirement-savers-isn-t-like-slavery

[Winehole23]

To show how a mainstream stock and bond portfolio would do under Research Affiliates’ 10-year model (https://www.researchaffiliates.com/en_us/asset-allocation.html), the report looks at the typical balanced portfolio of 60 percent stocks and 40 percent bonds. An example would be the $29.6 billion Vanguard Balanced Index Fund (VBINX). For the decade ended Sept. 30, VBINX had an average annual performance (https://personal.vanguard.com/us/funds/snapshot?FundId=0002&FundIntExt=INT) of 6.6 percent, and that’s before inflation. Over the next decade, according to the report, “the ubiquitous 60/40 U.S. portfolio has a 0% probability of achieving a 5% or greater annualized real return.”http://www.bloomberg.com/news/articles/2016-10-26/the-next-10-years-will-be-ugly-for-your-401-k

[Winehole23]

Moral of the story: Since most people’s risk tolerance isn’t likely to change dramatically, the amount you save may have to.

[Winehole23]

401Ks: make little sense for savers


The claim that a frog placed in slowly warming water will die without trying to escape is factually incorrect, but too useful a metaphor to discard. We have been slowly raising the temperatures on 401(k)s for 40 years, and we’re nearing the point that they no longer make sense for workers, except those fortunate enough to be offered the best plans or good employer matches. I don’t know which is worse, if the worker frog jumps out and thereby exacerbates the middle-class retirement savings problem, or if the worker frog stays in and finds its retirement plan eroded by unexpected effects of fees and taxes. So let’s turn off the heat and add some cold water.

https://www.bloomberg.com/opinion/articles/2020-07-21/401-k-plans-no-longer-make-much-sense-for-savers

[DMX7]

401Ks: make little sense for savers



https://www.bloomberg.com/opinion/articles/2020-07-21/401-k-plans-no-longer-make-much-sense-for-savers

If it weren't for 100% employer matches I probably would even have a 401K. But every employer I've ever had has offered it so you can't turn down what is essentially free money (even though it has to vest).

[DMC]

The stock market is buoyed by large funds like 401Ks and the ability to see into the future for some companies (Janus is dumping us, etc...) means they get to make creative moves to provide false support for their stocks until the big movers get out without triggering the feds. This can be done by offering company stock purchases below market value, as it shows big transactions which raises stock prices momentarily. There are a lot of tricks tied to the 401K.


I'd prefer to have my social security and anything else someone is investing "for" me. I do pretty well on my own.

[Nbadan]

I've traded on a lot of platform including Stash, Webull and others but M1 Finance is by far the best trading app I have found. It allows you to buy percentages of different stocks and other investments and to shift those percentages around as you see fit instead of being tied to any one investment.