The Seven Deadly Sins of 401(k) Plans

There are at least two things wrong with this picture: One-half of 401(k) and other defined-contribution plans offer no advice, only "education," according to a survey by Greenwich Associates -- and the education at times more closely resembles a glossy marketing packet for the firm's mutual fund offerings. Of the half of 401(k) plans that do offer advice, most of that advice comes over the Internet. Only 16% of plans offer advice over the phone or in person, according to Greenwich. Even when the education is useful -- and firms such as Vanguard, Fidelity and T. Rowe Price offer exceptionally good Web sites -- studies show that 401(k) participants rarely use these tools.

Second, when the fund firms pick up the costs, they then pass them along to participants, who pay the administrative and service costs in the form of fees -- and because the fees are often bundled together in the 401(k) plan literature, most participants don't know how much this shift is costing them. "Payment for plan services has slowly moved from plan sponsors to participants," said McHenry's Harris, who wrote the 2001 research report, "Revenue Sharing in the 401(k) Marketplace: Whose Money Is It?" He added, "The employer is offloading expenses to you."

The employer is supposed to make decisions on investments solely in the best interest of employees, but "that isn't happening in most instances," said Ted Benna, who created and gained IRS approval for the first 401(k) savings plan. This hasn't been a burning issue among corporate America, because "companies don't have to write a check for 401(k) services," he said.

Benna did note that companies such as IBM(IBM Quote) keep a tight rein on the costs of the plans, with expenses running as low as 10 basis points, or 0.1%, compared with expenses as high as 300 basis points, or 3%, at other companies. "If employers can get a better deal, they have a responsibility to do it," Benna said.

In the overwhelming majority of cases, individuals have no idea what they are paying for their plans or even who receives their money, and that brings us to the third and fourth deadly sins.

Third Deadly Sin: Outside Consultants Are Conflicted

Roughly half of all employers' searches for mutual fund firms now involve outside consultants, according to Greenwich Associates. By and large, this is a good development, says Greenwich Associates' Wechsler. "The individual's only question -- 'What do I do with my money?' -- wasn't getting answered by the company or the money management firm, because they were afraid to. Finally, there is somebody in this whole process willing to answer the question."