100% Fee Transparency
Most 401(k) plans are riddled with so many hidden
fees, the typical 401(k) participant isn’t aware
they’re even paying them. And while 401(k) sponsors
(employers) have a fiduciary duty to protect their employees against
fangled retirement plan fees, most employers themselves are pretty
clueless. Even worse, some employers are acting in collusion with
401(k) providers to obscure the true cost of their company’s
401(k) plan.
A recent study by the U.S. Government Accountability Office (GAO) proves this. The GAO study revealed that revenue sharing, whereby a mutual fund company shares its fee income with the 401(k) plan’s administrator, is a common practice.
The actual compensation can range from 0.05 percent to 1.25 percent. Why is it a problem? Because it creates a hidden incentive for the 401(k) service provider to recommend investment choices with higher fees, some of which may even include proprietary funds with substandard performance. The 401(k) of the future will not have 12b-1 commissions or other camouflaged costs, but rather, 100% upfront disclosure in plain English. Put another way, financial professionals will need to find other ways to get paid.
No More Phony Diversification
Today’s generation of 401(k) plans are
sold under the misleading premise that they offer adequate investment
diversification. Not only is this a massive failure by the mutual fund
and 401(k) industry to tell the truth, but it’s a regulatory
breakdown. The main explanation for the 401(k)
industry’s faulty and outdated definition of diversification
is due to the Employee Retirement Income Security Act (ERISA), which
the 401(k) industry has been adhering to. According to ERISA, an
adequately diversified 401(k) plan is one that offers exposure to
stocks, bonds, and cash. True diversification in a 401(k) plan
is an investment menu that goes beyond offering exposure to U.S. stocks
(NYSEArca: SCHB), international stocks (NYSEArca: VEA), bonds
(NYSEArca: AGG), and money market funds.
Account Statements that Tell
You Something
The chief purpose of a 401(k) plan is to provide
you with an adequate source of retirement income so that when
you’re grandma’s age, you don’t have to
eat ALPO for dinner. Yet, when 401(k) account holders look at their
quarterly statements, they have no clue about how much income their
current stash will generate. The future 401(k) plan will have
participant statements that clearly show how much monthly or annual
income that the person’s 401(k) sum is capable of generating.
Ultimately, this is the bottom line reason for a 401(k) plan
– to have the accumulated sum generate an adequate level of
income that 1) covers a person’s expenses and 2)
doesn’t prematurely run out.
Innovation, not Bureaucracy
401(k) plans of the future will be shaped by innovation instead of back
room deals between third party administrators (TPA) and mutual fund
companies. People will decide what they want to invest in, not some
bribed TPA. Although it seems like there’s
more
bureaucracy than innovation in the 401(k) market right now, hints of a
major shift are already here. Understand the future of 401k is not on
course to benefit the Individual, but in large to benefit the
bureaucrats , politicans, and magicians. The programs of tomorrow will
be re-designed and restructured or destroyed, by
greed.
Conclusion
Today’s generation of 401(k) plans are built upon outdated
legacy platforms that are one-trick ponies, because they only
accommodate mutual funds. It’s a method of business that has
some what worked well for the 401(k) industry in the past, but
won’t work in the future.
