More fraud happens in this country every year than you can possibly imagine. Technically, of course, it isn’t actually fraud because of the cheater’s loophole: disclosure.
Disclosure is what makes every scam legitimate in the eyes of the law. As long as the company cheating you tells you they are cheating you, somewhere, anywhere, then they aren’t really cheating you, because you “know” about it. That these disclosures take place inside of 40-page documents filled with jargon and legalese makes no difference. After all, you signed a piece of paper saying that your read and understood the document that you never read, or understood.
401k Fees and Employer Understanding
Make no mistake, the guy, or rather the team, of people that manage IBM’s 401k plan know exactly what they are doing. There is probably one or more finance people, legal people, and business people working on IBM’s 401k. As a result, the IBM 401k plan is certainly as well priced and delivered as the company requires. Subsequently, the 401k plan works well and is priced well for its employees as well. This is likely the case at most companies big enough to have both an actual HR Department and a Legal Department.
At smaller companies, however, this is not the case. Go to a small enough company and the 401k person is also the HR person, who is also the Office Manager, who also order the office supplies. This isn’t a bad thing, but it is disingenuous to pretend that this person had the time, inclination, and ability to tease out all the details in the various 401k plan options the company has.
There is a new proposal from the Department of Labor that would provide these smaller companies a way to navigate the book-sized plan documents they have and actually find and understand all the fees that they pay. This is important because many plans have gone out of their way to “nest” the fees within each other.
A 401k plan may say that it charges a 1 percent fee. The overwhelmed HR/401k administrator/Event Planner decides this is low and reasonable compared to the other plan documents he looked at. What he doesn’t realize, is that there is also a fee paid for each fund within the plan, and that the shares of those funds offered are the higher cost versions, and so on and so on.
The unfortunate truth is that even if this proposal makes it out of the comment stage, where it will be opposed by companies who offer plans, it might not be enough. But, it’s a better start than just picking based on the numbers the financial companies want to show you, and not the ones you have to calculate yourself after pulling all the relevant information out of that 16-page disclosure document that you read and understood.
Sign here.
Update: A new Supreme Court case tests the fiduciary duty companies have to employees enrolled in a 401k plan sponsored by the company.