Let's face it - U.S. companies aren't in the business of managing 401(k) plans. They're in the business of developing products and services that generate economic demand and profit from accompanying sales.
But plan sponsors do make mistakes and, in some cases, make 401(k) plan choices that go against the interests of employees, leaving significant amounts of money on the table instead of in a plan participant's pocket.
"I'm sure there are some malicious or apathetic employers out there that don't care about employee perks, and they are usually pretty overt in their actions and treatment of employees," says Andrew Bush, a financial planner with Horizon Wealth Management, in Baton Rouge, La.
Having said that, some employers are inadvertently screwing their employees because they are more consumed with running their business than with making sure their employees are being fairly treated in an area that they know little about, Bush notes. "Those who don't have systems, processes or protocols in place to actively review and benchmark their 401(k) plan are the unintentional 'screwers' of their employees," he says.
What are the most onerous and egregious 401k plans errors, mistakes and falsehoods generated by employers? TheStreet reached out to several retirement planning experts, and here's where they say companies are negatively compromising employees on their 401(k) plans:
Lack of decent investment options.
"Employees are often getting screwed on their 401(k)s, because their employers are simply too lazy to make switches to better investment options," says Paul Ruedi, a financial advisor with Ruedi Wealth Management, an RIA firm in Champaign, Ill. that specializes in retirement planning. "Employees themselves need to be proactive and ask their employers to make changes to their plans if they really want them to happen."
Lack of proper review of 401(k) plans.
Not only do companies under-deliver on 401(k) investment options, but they also often don't take the time to review the ones they do have. "In my practice, I often see 401(k) plans that haven't been reviewed and updated for years," states Stoyan Panayotov, founder of Babylon Wealth Management, a fee-only RIA firm in Walnut Creek, Calif. Panayotov says that employers have a fiduciary duty to review their plan investment lineup on a regular basis. "They have to verify fund performance, management changes, strategy changes and cost changes," he adds. "In the last few years, we saw a growing number of low-cost index funds, target date funds, and ETFs. Plan sponsors must include some of these options in the 401()k plan as they provide an inexpensive way to invest." Unfortunately, many active mutual funds have disappointing returns due to higher fees, Panayotov notes.
Setting low default rates.
Most employers set up very low default contribution rates by workers, Panayotov says. "The average default contribution rate is between 3% and 4%, and unfortunately, most employees go along with it without actively reviewing it," he says. "However, most advisors suggest that the mandatory saving rate should be between 12% and 15%. "This creates a dangerous gap and many people relying on their 401k will not be able to fully cover their retirement cost with the money coming from their 401(k)."
High plan fees.
Nothing is free, yet some investment advisors still hear from plan sponsors that they pay nothing for their retirement plan, and that's just not so. "A plan with fees 1% higher than another will see a 17% decrease in their account value," notes Jairo Gomez, director of retirement plan services at Hanson McClain Advisors, a financial advising firm headquartered in Sacramento. "That's $170,00 more over an employees working career, on a $1 million account balance." Plan sponsors should not only be bench-marking plans, but running "Request for Proposals" (RFP) and negotiating with their current vendors for fee and price reductions, Gomez says. "For employees, the key is to know what you're paying and all the services being provided," he adds.
Wasteful fee spending.
Employers too often "green light" fees paid to advisors for little or no guidance, service or education, says Bush. "This is a big deal for employees who have no one else to talk to about their financial lives and who need to be educated on how to do well for their future selves," he says.
The message to employees on employer 401(k) mismanagement is clear. If you suspect you're not getting the best results with your company retirement plan, bring the issue up with a trusted financial advisor and with your company's human resources department.
Left ignored, 401(k) mistakes made by employers can add up, and put a serious dent in your retirement assets down the road - just when you need those assets most.
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