Why bad/expensive 401(k)s will likely always be with us

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manwithnoname
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Re: Why bad/expensive 401(k)s will likely always be with us

Post by manwithnoname »

neurosphere wrote:
manwithnoname wrote: Pricing of costs of 401k plans is no different than the pricing of medical procedures.
This comment is somewhat absurd. And now I'm beginning to wonder how much you really understand about 401k plan fees and the pricing of medical procedures. I'm a physician who has worked for more than one hospital and more than one group practice in more than one city and am a member of multiple insurance plans, including medicare and medicaid. I know a thing or two about the pricing of medical services. One of my particular interests is the cost of healthcare. To link 401k plan pricing as analogous to medical services pricing in different parts of the country, or to different hospitals or different insurers as being analogous is so bizarre I feel you REALLY have not read this thread closely or just do not have a grasp on basic economic concepts and market forces. You just continue to miss the central question. I suggest you go back and re-read the thread. If you want to have a discussion about why medical procedure costs vary, start a new thread.


NS
Asking why the cost of medical procedures varies so much is not absurd to the end user. Its only absurd to the medical professionals.

You don't want to discuss the comparison because there is no rational basis for the wide variation in prices by insurers for the same procedure in the medical industry.

Since there nothing further of value to add to this discussion

goodnight and good luck
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JamesSFO
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Re: Why bad/expensive 401(k)s will likely always be with us

Post by JamesSFO »

manwithnoname wrote: Asking why the cost of medical procedures varies so much is not absurd to the end user. Its only absurd to the medical professionals.

You don't want to discuss the comparison because there is no rational basis for the wide variation in prices by insurers for the same procedure in the medical industry.

Since there nothing further of value to add to this discussion

goodnight and good luck
Here's the thing, I think if this was a discussion of insurance/medical billing practices, we would all agree (and there are numerous ProPublica and other reports on this) that medical billing is an area fraught with oddities and pricing problems. But I don't think anyone is holding out those extremes as overall acceptable long term. One could just as easily turn to the subject of airline/airfare pricing as well, although those are at least more subject to direct market forces and seem to reflect skill of the airlines at maximizing revenue by finding customer's maximum willingness to pay.

The similar analogy in the investment world is the existence of high(er) cost providers in the face of low(er) cost providers where overall there is minimal product differentiation. E.g. high priced general S&P500 funds.

I think the employer context though is different because there are odd forces at work, as an employee I'm "hostage" to my employer's choice of 401K providers. There is some similarity to healthcare, but ACA/Obamacare is weakening that link.
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JamesSFO
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Re: Why bad/expensive 401(k)s will likely always be with us

Post by JamesSFO »

Nice opinion column today in WashPost by Barry Ritzholtz about bad 401Ks:

http://www.washingtonpost.com/business/ ... story.html
leonard
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Re: Why bad/expensive 401(k)s will likely always be with us

Post by leonard »

tj wrote:
A smart plan designer would factor the match as part of total compensation. It's not an "extra" cost. It's compensation.
Maybe it's a carryover from the "old days", but I know my management hates the idea that someone can just leave the company and keep the match. So, yes, it is a cost when you compare 5 year vesting and the ability to eliminate the match when business is slow vs mandatory matches that can't be clawed back if an employee jumps ship.
At this point you have completely ignored the fact that one can set up a low cost plan via many low cost TPA's.
I never disputed any of that. i said there are reasons why a lot of plans cost more.
Are you seriously saying that having all these CPA's and lawyer's on call is driving over priced 401k's?
Absolutely, that's the only thing that makes logical sense to me. Otherwise why not just make the 401k the same as the the 403b where the individual can set up their investments with any number of providers including Vanguard.
No, it's not an extra cost. Simply factor in a lower salary such that match plus salary is the same. I know it can easily be done this way. Any company that takes on a non-safe harbor 401k is increasing their cost of absolutely no benefit.

I run a 401k for a plan and after initial consultation - they simply aren't involved.

Sorry - but at this point you seem to be making what you think are making what I will kindly call "educated guesses" that are way off the mark.

Do you actually participate in a 401k plan in any administrative role at all? Do you actually know the cost structure or are you simply guessing?

This stuff is easily low cost and not hard. You seem be saying these things are only expensive and require a team of lawyers and CPA's to execute. Simply NOT true.
Leonard | | Market Timing: Do you seriously think you can predict the future? What else do the voices tell you? | | If employees weren't taking jobs with bad 401k's, bad 401k's wouldn't exist.
tj
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Re: Why bad/expensive 401(k)s will likely always be with us

Post by tj »

leonard wrote: No, it's not an extra cost. Simply factor in a lower salary such that match plus salary is the same. I know it can easily be done this way. Any company that takes on a non-safe harbor 401k is increasing their cost of absolutely no benefit.
Obviously if you were starting from scratch (e.g. a startup) , that would be a no brainer, but you tell everybody who has been working for 10-15 years or longer that their salary drops by 3% so that they can get a 3% match..yeah right. Most people would rather have the higher salary.
This stuff is easily low cost and not hard. You seem be saying these things are only expensive and require a team of lawyers and CPA's to execute. Simply NOT true.
Do you have over 100 participants in your plan? What CPA firm audits your plan and how much do they charge you? Has your plan been audited by the DOL? How much did your audit defense cost? Maybe you feel comfortable rolling the dice, but not every business owner does.
Do you actually participate in a 401k plan in any administrative role at all?
Not a chance - I don;t want to be fiduciarily responsible for the decisions that they are making. I'd love it if the plan was set up the way you describe, but it's not. That doesn't mean what they are doing is wrong or "excessive fees".
leonard
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Re: Why bad/expensive 401(k)s will likely always be with us

Post by leonard »

tj wrote:
leonard wrote: No, it's not an extra cost. Simply factor in a lower salary such that match plus salary is the same. I know it can easily be done this way. Any company that takes on a non-safe harbor 401k is increasing their cost of absolutely no benefit.
Obviously if you were starting from scratch (e.g. a startup) , that would be a no brainer, but you tell everybody who has been working for 10-15 years or longer that their salary drops by 3% so that they can get a 3% match..yeah right. Most people would rather have the higher salary.
This stuff is easily low cost and not hard. You seem be saying these things are only expensive and require a team of lawyers and CPA's to execute. Simply NOT true.
Do you have over 100 participants in your plan? What CPA firm audits your plan and how much do they charge you? Has your plan been audited by the DOL? How much did your audit defense cost? Maybe you feel comfortable rolling the dice, but not every business owner does.
Do you actually participate in a 401k plan in any administrative role at all?
Not a chance - I don;t want to be fiduciarily responsible for the decisions that they are making. I'd love it if the plan was set up the way you describe, but it's not. That doesn't mean what they are doing is wrong or "excessive fees".
So, you don't actually participate in the administration of the plan, but have somehow developed detailed opinions about their administration, auditing and management based on.....?

Creating these low cost plans is easy. I haven't heard of a single case of a company that uses one of the low cost providers being bankrupted by excessive audit fees.

So, yes, these fees are excessive and easily avoidable. And, btw, the lower the owners ROI and executives rates of return - right along with the rest of the employees. Owners and execs would be much better off under the low cost plans as well, since they tend to have much larger balances in the plan.

You want to believe this stuff is hard and requires expensive risk mitigation like with 100's of CPA's and Lawyer's - then be prepared to have lower retirement balances to pay for the excessive cost.
Leonard | | Market Timing: Do you seriously think you can predict the future? What else do the voices tell you? | | If employees weren't taking jobs with bad 401k's, bad 401k's wouldn't exist.
tj
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Re: Why bad/expensive 401(k)s will likely always be with us

Post by tj »

100's of CPA's and lawyers?

Just one is expensive....
hiddensee
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Re: Why bad/expensive 401(k)s will likely always be with us

Post by hiddensee »

The basic problem is that 401k plans are attached to employers rather than individuals. In the UK, the tax-free investment wrapper simply has an annual limit on contributions that is not dependent on income, with a free choice of cash or stock investments made by individuals themselves. While "employer match" might naively appeal, that money is just coming out of your pay somewhere else, while the employer's control over the choice of investments is a huge deadweight cost for many.
tj
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Re: Why bad/expensive 401(k)s will likely always be with us

Post by tj »

hiddensee wrote:The basic problem is that 401k plans are attached to employers rather than individuals. In the UK, the tax-free investment wrapper simply has an annual limit on contributions that is not dependent on income, with a free choice of cash or stock investments made by individuals themselves. While "employer match" might naively appeal, that money is just coming out of your pay somewhere else, while the employer's control over the choice of investments is a huge deadweight cost for many.

I agree with this 1000%. Get rid of the 401k and increase the IRA.


The argument against that is that people wouldn't save if the employers didn't do the automatic deductions.
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SkierMom
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Re: Why bad/expensive 401(k)s will likely always be with us

Post by SkierMom »

Nuerospere:

Can you explain what the "firm's 5500 filing" is and how these forms can be publicly-accessed for the particular company you may work for?
tj
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Re: Why bad/expensive 401(k)s will likely always be with us

Post by tj »

SkierMom wrote:Nuerospere:

Can you explain what the "firm's 5500 filing" is and how these forms can be publicly-accessed for the particular company you may work for?

You can see a 5500 at brightscope.com and likely elsewhere. I'ts a pretty vague form ,but if you are self employed I can see why you wouldn't want people seeing it since by definition it is your assets rather than employees of some random corporation's in aggregate.
manwithnoname
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Re: Why bad/expensive 401(k)s will likely always be with us

Post by manwithnoname »

hiddensee wrote:The basic problem is that 401k plans are attached to employers rather than individuals. In the UK, the tax-free investment wrapper simply has an annual limit on contributions that is not dependent on income, with a free choice of cash or stock investments made by individuals themselves. While "employer match" might naively appeal, that money is just coming out of your pay somewhere else, while the employer's control over the choice of investments is a huge deadweight cost for many.
Purpose of tax legislation requiring employer to maintain 401k plan is to encourage the employer make minimum contributions for lower paid employees in order to enable HCEs to contribute a deductible contribution of 17.5 or 23k from their salary. No brainer.

do you really think the UK pension system is better?

http://search.mywebsearch.com/mywebsear ... rd=9&ct=AR&
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joe8d
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Re: Why bad/expensive 401(k)s will likely always be with us

Post by joe8d »

tj wrote:
hiddensee wrote:The basic problem is that 401k plans are attached to employers rather than individuals. In the UK, the tax-free investment wrapper simply has an annual limit on contributions that is not dependent on income, with a free choice of cash or stock investments made by individuals themselves. While "employer match" might naively appeal, that money is just coming out of your pay somewhere else, while the employer's control over the choice of investments is a huge deadweight cost for many.

I agree with this 1000%. Get rid of the 401k and increase the IRA.


The argument against that is that people wouldn't save if the employers didn't do the automatic deductions.
They would be required to deduct and send to wherever the employee designates, just like payroll savings
All the Best, | Joe
ajcp
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Re: Why bad/expensive 401(k)s will likely always be with us

Post by ajcp »

tj wrote:
hiddensee wrote:The basic problem is that 401k plans are attached to employers rather than individuals. In the UK, the tax-free investment wrapper simply has an annual limit on contributions that is not dependent on income, with a free choice of cash or stock investments made by individuals themselves. While "employer match" might naively appeal, that money is just coming out of your pay somewhere else, while the employer's control over the choice of investments is a huge deadweight cost for many.

I agree with this 1000%. Get rid of the 401k and increase the IRA.


The argument against that is that people wouldn't save if the employers didn't do the automatic deductions.
Keep 401ks, raise the IRA limit to 23,000, get rid of the limits being independent of each other. Done and done.
hiddensee
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Re: Why bad/expensive 401(k)s will likely always be with us

Post by hiddensee »

manwithnoname wrote:
hiddensee wrote:The basic problem is that 401k plans are attached to employers rather than individuals. In the UK, the tax-free investment wrapper simply has an annual limit on contributions that is not dependent on income, with a free choice of cash or stock investments made by individuals themselves. While "employer match" might naively appeal, that money is just coming out of your pay somewhere else, while the employer's control over the choice of investments is a huge deadweight cost for many.
Purpose of tax legislation requiring employer to maintain 401k plan is to encourage the employer make minimum contributions for lower paid employees in order to enable HCEs to contribute a deductible contribution of 17.5 or 23k from their salary. No brainer.
I grant that's a concern, but the concern is not really anything about employers, it's about forcing short sighted employees to save for their retirements. You can just as well make a law that says all workers must save 8% of their income unless they specifically opt out (which is what has just happened in the UK).
do you really think the UK pension system is better?

http://search.mywebsearch.com/mywebsear ... rd=9&ct=AR&
What specifically is bad in that article?



edit: The biggest problem with the British system seems to be that British people don't actually save any money. http://www.telegraph.co.uk/finance/pers ... t-fee.html this story is typical of what gets pensions a bad reputation in Britain. So yes, exorbitant fees and so forth - the same problem as in the US albeit here probably due to ignorance rather than lack of other options - but he only saved £6k? Ultimately it is hardly worth arguing about. I am a regular on a British financial forum, perhaps aimed at a less wealthy demographic than this one, but nonetheless at the subset of people who care enough about their finances to read about them on the internet and post on a forum. There, an impressive pension pot is around the £30k mark - this would receive the same sort of reaction as perhaps a $500k pot on a US forum like Bogleheads. A full order of magnitude difference.
leonard
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Re: Why bad/expensive 401(k)s will likely always be with us

Post by leonard »

tj wrote:100's of CPA's and lawyers?

Just one is expensive....
OK. let's pick out the one point we think we can win on.

Even if one is expensive - not when included in a ratio of total plan assets - the all in expense ratio.

I have been involved in several plans to this point and have never - never seen a billable hour by a lawyer or CPA.

So, I have no idea where you get the impression that this is a massive expense.

So - I guess the CPA and lawyer expenses were the only thing of relevance in my post - huh?

Since you were mum on the issue of direct experience administering a 401k - shall I assume that your opinions on these operational issues and expenses are based on conjecture?
Leonard | | Market Timing: Do you seriously think you can predict the future? What else do the voices tell you? | | If employees weren't taking jobs with bad 401k's, bad 401k's wouldn't exist.
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mojave
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Re: Why bad/expensive 401(k)s will likely always be with us

Post by mojave »

I had a co-worker recently freak out over a company email letting us know about updates in some of the investments available in our Fidelity 401ks. He thought it meant Fidelity was taking some of his money away. I couldn't believe someone could be that clueless about their retirement fund but I guess I shouldn't be surprised. :shock:

Thankfully we have good options.
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neurosphere
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Re: Why bad/expensive 401(k)s will likely always be with us

Post by neurosphere »

manwithnoname wrote:Participants do not realize just how much administrative overhead is required to maintain 401k plan compliance with all of the applicable laws and regulations and this compliance cost $ above and beyond normal admin fees.
That's exactly the point. It's what most of us are saying all along. "Participants do not realize". And thus, for the same size plans, with the same number of participants, there is a HUGE variation in the cost. Some companies are just woefully inefficient in dealing with these administrative expenses, and some companies exploit the "participants do not realize" part of things to jack up fees and increase profits. No one is arguing there are expenses to a plan.

What we are saying is that MOST 401k providers charge 5 times what others charge. And that the average plan costs/expenses, stink. They stink really really badly. The fees charged are unnecessarily high.
Enjoying the Ride
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Re: Why bad/expensive 401(k)s will likely always be with us

Post by Enjoying the Ride »

On February 1st my wife's business will transition from a Voya plan with all-in fund costs above 2% to a low-cost plan with expense rations at 10bps or less. It only happened because the high-pressure sales tactics of an ADP 401(k) sales rep. inspired me to finally do the work to understand the plan (which, as an aside, led me to the Bogleheads forum, and that is truly one of the highlights of my 2015, thank you all).

I have a financial background and it was a challenge for me to understand the different roles, uncover all of the costs, identify low cost options like Employee Fiduciary, Ubiquity and others, etc. My wife and her partner (both dentists) would have never gotten there. Even now, when I am happily ranting and raving about how their new plan will be better than those of most large employers, the just smile and nod along with me, but I can tell that they still don't fully understand the impact, despite my efforts to bring them along.

Given our experience this year, I would have to agree that the bad plans will always be with us. Inertia, lack of education on the part of plan sponsors, and lack of accountability for the financial services community will keep it that way. As far as I am concerned, these plans into the category of legalized theft.
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