What’s Wrong with 401(k) Plans

The 401(k) revolution isn’t increasing retirement security for most employees. I don’t know many people who dispute that. But the real question is: Why aren’t 401(k) plans working. Of course, two reasons are employee behavior. They don’t save enough, and they don’t invest. But another problem, according to this post, is that most 401(k) plans are fundamentally flawed. Edward Siedle says he’s reviewed a lot of plans, and most suffer from at least one of three flaws. Either they’re completely contracted to one firm, have inherent conflicts (such as the employer starting its own money management division), or they are too complicated. Is your plan suffering from one or more of these problems? Is it worth the tax benefits of contributing to it?

Financial services firms are notorious for offering conflicted 401(k) plans. The fiduciaries of virtually all 401(k)s sponsored by money management firms have coincidentally concluded that hiring the employer-asset manager to manage plan assets, as opposed to any of the thousands of other registered investment advisers with competitive performances, is in the best interests of these plans. For years the Department of Labor has looked the other way, apparently recognizing that forcing money managers when acting as plan sponsors to acknowledge their weaknesses is unworkable—even if participants suffer.