The Biggest Problem with 401(k) Plans Is…


(A version of this article was originally published in NAPA Net.)

Imagine when defined contribution plans were first pitched to mid and small company CFOs – shift all the liability and costs of investing and administration to your employees. It seemed too good to be true especially when compared to defined benefit (DB) plans. But like most things that promise everything for nothing, there’s always a catch.

DC plans are complicated by nature. Different parties have to work together to create a good, functional DC plan that limits cost, liability and work for the employer while maximizing retirement income for participants. The record keeper, advisor, money managers, TPA (if applicable) and payroll vendor have to work in partnership with each other and with the plan sponsor. When one company performed all services like Fidelity did in the early 1990’s, the system was more efficient but also fraught with conflict. As the industry unbundles, which will only continue with TDFs, it get more complicated which is why plan advisors have become so popular acting as the quarterback. But no matter how good the advisor, there’s only so much they can do if the plan sponsor is not knowledgeable or cooperative.

Which brings us to what I think is the heart of the problem. Each TPSU (The Plan Sponsor University) program opens with two simple questions:

  1. How many people focus their time exclusively on their retirement plan?
  2. How many have formal training as a plan fiduciary?

After almost 125 programs, no one has raised their hand yet. The significant responsibility of running a DC plan has been thrust upon most people who are forced to learn on the job while handling 10 other responsibilities, especially in the small and mid-size market. They are barraged by sales calls almost daily. The industry throws out terms and concepts they have no idea what they mean including, for some, simple ones like TDFs and Investment Committees. Yet these are the key decision makers even if their decisions are limited to picking outsources to help manage the plan.

Until the DC industry convinces employers why a company’s DC plan is as important as the DB plan, plan sponsors will not hire experienced people or properly train their staff. Just as underfunded DB plans hit a company’s bottom line, older employees on the payroll who should or want to retire but cannot also affect a company’s P&L negatively.

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