Is Your 401(k) Plan Really a ‘Benefit’?

 After being named to Worth Magazine’s 100 Most Powerful People in Global Finance, I sat down with Dan Roth to talk about something I’m very passionate about — Americans’ ability to achieve financial freedom.

Are you relying on your 401(k) for retirement? If so, you’re in good company — the 401(k) is the retirement plan of choice for the majority of American businesses, adding up to a total of $4.4 trillion in retirement account balances.

But here’s something you might not be aware of:  Although “401(k)” is a beneficial piece of tax code, there are often high fees embedded in these plans, and they are eating away at your — and your employees’ — nest egg.

Even though the Department of Labor (DOL) initiated a law requiring plans to report fees to plan sponsors and participants, the fees are still far from being transparent. They are buried in the fine print — those 50-page fee disclosure documents that few have ever spent the time to find, let alone know how to decipher. Revenue sharing, expense ratios, wrap fees, soft dollar costs, transaction costs, account charges, redemption fees, deferred sales charges — there are more than 17 different kinds of fees that can all be stacked up. The DOL estimates that hidden fees and backdoor payments are costing Americans approximately $17 billion annually. 

So it’s not a big surprise that 8 out of 10 people still do not know the cost of their 401(k) plan and north of 60% believe they are not paying any fees at all!*   

But nothing could be further from the truth. Fees matter, and you are paying them. And if you don't get control of the situation, they will continue to erode your accounts making it near impossible to save enough for retirement. To get an initial estimate of the fees in your plan, go to www.ShowMeTheFees.com.    

When the choices in your plan aren't really choices at all.

One of the biggest red flags when it comes to expensive 401(k) plans is the industry’s reliance on expensive “actively managed” mutual funds. These managers are trying to “actively” beat the the market (index) through stock picking. More often than not, you are overpaying for under performance. In fact, in the last 10 years, only 4% of all the 8500+ mutual funds have been able to beat the market (index). That means 96% of them failed!   

This is why experts like Warren Buffet and Vanguard founder John Bogle say that all investors should simply use low-cost index funds that are a fraction of the cost. These funds are very inexpensive because they simply own all the stocks in the entire index (like the S&P 500 index, for example). But because low-cost index funds don't pay commissions and don't share in revenues with 401(k) plan providers, you rarely see them in 401(k) plans. 

Business owners beware

Business owners, also known as plan sponsors, have a legal “fiduciary” duty to provide a competitive plan that is regularly “benchmarked” to determine how competitive the plan really is.  The law says that fees be both fair and reasonable. But very few plan providers are making business owners aware of their obligation to benchmark, which leaves the business owner with a ticking “liability” time bomb. 

In 2014 the Department of Labor hired 1000 new auditors to find plans that are out of compliance, according to CFO Daily. The average fine for a plan out of compliance was $600,000!

What’s more disconcerting is the fact that employees are now suing their employers and having plenty of success. I am a board member and parter of America’s Best 401(k), which is providing complimentary “side-by-side” benchmarks  to any business owner who requests one. To take advantage of the service, visit www.AmericasBest401k.com.