Is this why 401k fees are so high?

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Is this why 401k fees are so high?

Post by TimDex »

Last night, I was reading a client bulletin put out by a local CPA. One of the topics in it was the "safe harbor" provisions for 401(k) plans.

I'd heard of this but not in detail. Apparently, highly compensated employees might not be able to contribute in full to the plan if lower-paid workers don't defer enough income. So, to meet regulatory limits, a company can contribute in various ways to either match employee contributions or simply contribute a percentage of salary. Doing this means the highly compensated employees can contribute up to the max.

Reading this, it struck me why we see so many 401(k) -- and possibly 457 -- plans that offer a matching percentage but also beat employees to death on the expense and administrative fees.

...because it's in the interest of executives to make sure they hit the "safe harbor" matching regulations, because after all it's out of the company's pocket, not theirs...but they have no interest in what it costs the employees in fees, because there is no penalty for that.

It really doesn't affect me personally, but it does gall me every time someone shows up here, starts posting details about their deferred plan. All they have to do is mention the word Principal, Hartford, or the name of pretty near any insurance or brokerage company, and you know it's going to be a plan that shafts the employees on fees.

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Post by Wagnerjb »

you know it's going to be a plan that shafts the employees on fees.
Tim: aren't "highly compensated employees" also considered employees? If so, they get shafted on the 401k fees too, don't they?

The real problem is that highly compensated employees "get shafted" if the lower paid employees are not smart enough to save money. Why should the executives be denied access to a 401k plan just because others choose to spend evey dime they make?

Don't forget that high fees serve as a disincentive to using the 401k plans. It seems to me that best approach would be a very small company match, with a 401k plan that has low fees. (This would cost the company the same as a high match with high 401k fees). The company match and the ability to save tax deferred in a low-cost plan would be two reasons for employees to contribute.

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Post by magellan »

Wagnerjb wrote:The real problem is that highly compensated employees "get shafted" if the lower paid employees are not smart enough to save money. Why should the executives be denied access to a 401k plan just because others choose to spend evey dime they make?
IMHO, the real problem is the idiotic provision that penalizes firms with a "diverse" work force in favor of firms with only highly paid workers with high contribution rates. I understand the idea of creating incentives to increase plan participation, but lawmakers should have thought this through more carefully.

Here's a true story about how government incentives can go haywire...

I worked for a large computer networking company in the 90s and as a highly compensated employee, I got a "refund" check at the end of each year for excess contributions to the plan.

One year, the company decided to stop manufacturing in the USA and laid off all the manufacturing workers. The next year I got my full 401k deduction because the low payed/low contributing employees were all gone.

Outsourcing turned out to be a great way to drive the 401k participation rate through the roof.

Last edited by magellan on Mon Oct 08, 2007 3:08 pm, edited 1 time in total.
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Post by stratton »

I'm a W-2 contract employee and I have to watch out for the highly compensated employee border. Theoretically, if I'm at the end of the year and working overtime it may shove me over the line it would be, "I'm sorry, but you're now a highly compensated employee so we're giving you back $9,500 of your 401K contribution." Needless to say those few extra bucks might really be negative several hundred dollars an hour.

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Because we are not a good lobby

Post by tadamsmar »

We are not good a lobbying our employers or Congress. And the securities industry is good at lobbying congress to keep the regulators under control.

It's worst than you think because it is legal to hide fees in inflated transaction costs:
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Other reasons

Post by sport »

One reason that 401k plans have high fees is that the company may be a small one. In this case, the plan administrator, who is in business to make a profit, must obtain his profit from a small base of investors. If the employer will not agree to foot the bill for the plan expenses, then the money must come from the participants.

Another reason is that the participants are a "captive audience". They cannot choose another lower cost plan. They are stuck with the plan offered to them. The lack of competition removes any incentive for the administrator to offer lower cost options. If the employer is convinced that this plan is in its best interest, whether or not it actually is, the employees only option is to participate or not. With the tax advantages and possibly matching money, it is usually worthwhile to participate, even if expenses are high.

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Sunlight is the best disinfectant

Post by grok87 »

I think as high fees come under more scrutiny they are going to go away. See for example this report from the Investment Company Institute (ICI).

Everyone with a high fee 401k plan should be waving this report in front of your HR department. For example it shows that the average domestic stock fund in a 401k plan costs 0.70%. Even this is much to high of course, but it is a start!

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