The 401(k) plan has been sold backwards since the beginning in the early 1980s. Since it is the sole source of retirement for most Americans is should be sold more like a pension plan. Most Americans do not know how nor do they wish to pick their own fund mix. There also is the matter of making emotional decisions with their plan assets. Their choices should be limited to approving the risk level.

“Captured” plans: Over 90% of 401(k) plans involve the employer effectively “outsourcing” the entire administration and management of the plan. Financial vendors shape the investment program, including the mutual fund investment options to be offered, and divvy-up between themselves the compensation to be derived from the plan’s assets—all this with only superficial or illusory input from sponsors. Sponsors are permitted to choose Coke or Pepsi—i.e., any carbonated beverage (actively managed mutual fund) loaded with caffeine and sugar (fees permitting kick-back payments to gatekeepers).There is a sucker in the room and it’s, for sure, the participants and often the employer as well.

Understandably, the overwhelming majority of 401(k) plan sponsors do not have sophisticated investment personnel charged with responsibility for overseeing the retirement plan and cannot afford to. (Recall that over 90% of plans are tiny—under $5 million.) Owners or human resource types dedicating, at best, a few hours a week to thwarting Wall Street sharks intent upon devouring plan assets, don’t stand a chance.

In my investigative experience, it is mind-blowing just how much money can be skimmed by Wall Street from even a single large plan—tens of millions—seemingly unbeknownst to employers.

While investment firms deliberately seek to capture or control plans so they can maximize the profits they derive from 401(k)s, the industry has successfully fought efforts to hold vendors responsible, as fiduciaries, for the plans they bilk. Given industry marketing pitches, it should come as no surprise that employers regularly lose sight of the fact that under ERISA, the sponsor remains responsible as the named fiduciary to the plan even when the sponsor delegates or outsources management of the plan.

The Wall Street bullies have used the 401(k) plan as a cash cow. The undisclosed fees generated by these plans has been staggering at the expense of the plan participants(employees).

Please comment or call to discuss how this affects you and your company.