Why don't 401K managers fight on our behalf?

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Ron Scott
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Why don't 401K managers fight on our behalf?

Post by Ron Scott » Tue Mar 06, 2018 7:39 am

The Times has an editorial that argues the financial world hates pensions and loves 401Ks because the 401K crowd are essentially compliant wimps who accept high fees without complaints over low returns, while pensions funds (Calpers, for example) are activists who raise hell on a frequent basis get fund managers fired, etc.

https://www.nytimes.com/2018/03/05/opin ... ght-region

I'm not sure I buy everything in their editorial but I do wonder about the main point. Are American workers, who are now almost entirely reliant on 401Ks, poorly served by managers who are asleep at the wheel or look the other way while they try to get business from the funds they sell to employees? Have you ever heard of a 401K manager who sued a fund for poor performance or misrepresentation?

If so, what can be done to change this?

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jharkin
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Re: Why don't 401K managers fight on our behalf?

Post by jharkin » Tue Mar 06, 2018 8:02 am

Not surprising at all.

In a pension, individual participants are guaranteed a defined payout by the plan. Therefore the responsibility is on the plan administrators to ensure that the plan performs and makes enough return on its investments to cover those guaranteed payments. If they fail, than the guaranteeing organization (I'm guessing the state of CA in the case of CALPERS, the PBGC in the case of certain private pensions) will be left holding the bag.

No such arrangement exist for 401k's. There is no single responsible party since every participant is individually responsible for their own investment choices. And no guarantee is made to participants. Usually the plan administrators are beholden only to the sponsoring employer (whose primary interest is usually reducing their own admin costs), but by the time participants get to the payout phase and may discover they where screwed they are no longer with that employer and thus dont have a collective voice.

This is only one of many issues with 401k's. An even bigger problem is that as a society we have shifted all this responsibility from corporations to individuals to take responsibility for their finances, without empowering those individuals with the same level of financial know how to do it properly. We all know the state of financial literacy in this country is abysmal. Outside of BH, the vast majority of 401k participants dont have a clue what they are doing with their money. Many dont even understand why they should participate at all. If it where not for the recently added mandatory minimum enrollment rules participation percentages would probably be in the single to low double digits at best. :oops:

Shallowpockets
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Re: Why don't 401K managers fight on our behalf?

Post by Shallowpockets » Tue Mar 06, 2018 8:07 am

This article was a ramble. It mostly talks about the demise of the tradional pension fund.
Main focus is the shift away from government pensions plans to 401ks.
In the private sector most of that has already happened.
When you have a 401 it might be good to know how it works and what vehicles are offered to invest. That is, sadly, usually not the case for most workers. So self education would be a smart move.
OP ends his post with mention of sueing. I think that is taking it a bit far unless you find problems. It comes across as looking for a fight.
All in all it is a big nothing. Private sector verses government plans. Most of us have no pension anymore, or never did. Lamenting the offerings or management of government pensions falls on unsympathetic ears. I guess the world is just catching up. To many of us, government pensions are like the gravy train.

Buysider
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Re: Why don't 401K managers fight on our behalf?

Post by Buysider » Tue Mar 06, 2018 8:19 am

"raditional pension funds have also brought almost all of the most successful shareholder lawsuits, from the suits against Enron and Worldcom to the one against Wells Fargo."

Successful? That's a laugh. Most class action securities lawsuits involve one set of shareholders suing another set of shareholders. If they win, the company pays cash out of its pocket, less a third to the lawyers, to a set of former shareholders. The current shareholders pay the bill.

There is no punishment in class action securities litigation, it is merely an expensive way to move cash between shareholders who bought at "inflated" prices and the poor shareholders holding the bag when this litigation is settled.

There is no free lunch with this litigation, and ultimately all the costs of this litigation is borne by the shareholders.

goblue100
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Re: Why don't 401K managers fight on our behalf?

Post by goblue100 » Tue Mar 06, 2018 8:23 am

Not everybody is taking it, my wife worked at Fujitsu and she just got a class action suit in the mail. Fujitsu is being sued for not providing enough low cost fund options. For the record, Fidelity was the 401k provider and I didn't think the fund selection was that bad, but we filled out the paperwork.
Other law suits:
https://www.benefitspro.com/2017/08/30/ ... 0206081854

Fujitsu:
http://www.pionline.com/article/2017121 ... 14-million
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ivk5
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Re: Why don't 401K managers fight on our behalf?

Post by ivk5 » Tue Mar 06, 2018 8:29 am

Ron Scott wrote:
Tue Mar 06, 2018 7:39 am
The Times has an editorial
Just for clarity: the piece is not an editorial by the NYT Editorial Board but an op-ed by David Webber, a law professor at Boston University whose research/writing has touched on, among other things, shareholder advocacy and related issues.

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Re: Why don't 401K managers fight on our behalf?

Post by masteraleph » Tue Mar 06, 2018 9:33 am

goblue100 wrote:
Tue Mar 06, 2018 8:23 am
Not everybody is taking it, my wife worked at Fujitsu and she just got a class action suit in the mail. Fujitsu is being sued for not providing enough low cost fund options. For the record, Fidelity was the 401k provider and I didn't think the fund selection was that bad, but we filled out the paperwork.
Other law suits:
https://www.benefitspro.com/2017/08/30/ ... 0206081854

Fujitsu:
http://www.pionline.com/article/2017121 ... 14-million
Reading the Fujitsu link, it looks like the fund wasn’t invested in the lowest available ER share classes. It would be the equivalent of having Vanguard Investor shares instead of Admiral- perhaps better than most 401ks, but not as good as you should be qualifying for.

dbr
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Re: Why don't 401K managers fight on our behalf?

Post by dbr » Tue Mar 06, 2018 9:48 am

Ron Scott wrote:
Tue Mar 06, 2018 7:39 am

If so, what can be done to change this?
The same answer as applies to a number of other issues, well actually two answers:

1. Write your congressman.

2. Sue 'em.

But seriously, it is a huge problem and there are also many employers who have established excellent 401k plans. If your employer has a lousy plan what else are they lousy at, environment, health and safety, employment discrimination, poor service to customers, etc., etc.?

Ron Scott
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Re: Why don't 401K managers fight on our behalf?

Post by Ron Scott » Tue Mar 06, 2018 7:24 pm

jharkin wrote:
Tue Mar 06, 2018 8:02 am
In a pension, individual participants are guaranteed a defined payout by the plan. Therefore the responsibility is on the plan administrators to ensure that the plan performs and makes enough return on its investments to cover those guaranteed payments.

No such arrangement exist for 401k's. There is no single responsible party since every participant is individually responsible for their own investment choices.
Yeah; this is the wrong attitude. It's certainly a POPULAR attitude, just not a good one.

Before I retired I served on a 401K committee at the company and had some fiduciary responsibility to ensure we were serving the interests of the employees. The investment options were always garbage. 30 or so funds no one ever heard of, divyed up among 5-6 investment houses, with big fees people on this board would vomit on. There was ZERO interest in complaining about fund performance "since we can dump them and pick new ones" with sufficient frequency.

I was able to get a Fidelity S&P index in there and I believe the fees were at or below Admiral-level vanguard total market, so I felt I'd accomplished something. It became a popular option since it was 10X cheaper than most of the other stuff.

Problem is, 401K is how America invests for retirement now. A little more attention would help the average Joe get it together...

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Re: Why don't 401K managers fight on our behalf?

Post by michaeljc70 » Tue Mar 06, 2018 9:14 pm

Shallowpockets wrote:
Tue Mar 06, 2018 8:07 am
This article was a ramble. It mostly talks about the demise of the tradional pension fund.
Main focus is the shift away from government pensions plans to 401ks.
In the private sector most of that has already happened.
When you have a 401 it might be good to know how it works and what vehicles are offered to invest. That is, sadly, usually not the case for most workers. So self education would be a smart move.
OP ends his post with mention of sueing. I think that is taking it a bit far unless you find problems. It comes across as looking for a fight.
All in all it is a big nothing. Private sector verses government plans. Most of us have no pension anymore, or never did. Lamenting the offerings or management of government pensions falls on unsympathetic ears. I guess the world is just catching up. To many of us, government pensions are like the gravy train.
I agree. It also talks about credit cards/bank accounts opened without authorization which has zero to do with this and was just a bash.

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SteelyEyed
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Re: Why don't 401K managers fight on our behalf?

Post by SteelyEyed » Tue Mar 06, 2018 9:35 pm

The "401k manager" is usually somebody in the HR department. Have you ever spoken to this person? In my experience, it is assigned to a person as a collateral duty with few big-picture responsibilities regarding the plan. Most of their time is spent on completely unrelated work. When they do perform 401-related tasks, it is more like correcting administrative errors. You probably know more than they do. It is quite possible that they do not know what a good plan looks like.

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Re: Why don't 401K managers fight on our behalf?

Post by michaeljc70 » Tue Mar 06, 2018 9:40 pm

SteelyEyed wrote:
Tue Mar 06, 2018 9:35 pm
The "401k manager" is usually somebody in the HR department. Have you ever spoken to this person? In my experience, it is assigned to a person as a collateral duty with few big-picture responsibilities regarding the plan. Most of their time is spent on completely unrelated work. When they do perform 401-related tasks, it is more like correcting administrative errors. You probably know more than they do. It is quite possible that they do not know what a good plan looks like.
I didn't read all the comments, but I have to believe that 401k fees the employee pays are directly inverse to 401k fees the employer pays. Big companies tend to pony up money and get low ER funds and fees for employees. Other companies, it just depends.

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SteelyEyed
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Re: Why don't 401K managers fight on our behalf?

Post by SteelyEyed » Tue Mar 06, 2018 9:47 pm

michaeljc70 wrote:
Tue Mar 06, 2018 9:40 pm
I didn't read all the comments, but I have to believe that 401k fees the employee pays are directly inverse to 401k fees the employer pays. Big companies tend to pony up money and get low ER funds and fees for employees. Other companies, it just depends.
I have never worked for MegaCorp, so that is probably a good point. They likely have more informed, dedicated personnel on these tasks.

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Re: Why don't 401K managers fight on our behalf?

Post by KSActuary » Tue Mar 06, 2018 10:19 pm

Terminated a lot of pension plans in my day and the overriding reason was that US corps wanted to off-load pension liabilities and replace them with much lower cost employer 401k matches.

Financial industry loves 401k plans because they get paid using asset-based fees where the fees increase over time as the plan grows for not doing much more work. 401k plans should be fixed fee only.

Seems like Fidelity mentioned quite often when plans get sued.

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Re: Why don't 401K managers fight on our behalf?

Post by stxman » Tue Mar 06, 2018 10:23 pm

In my experience either the company representative simply doesn't care, doesn't know, or is being offered financial incentives from their provider to offer high fee plans.

As a counterpoint, a company called guideline has the cheapest 401K arrangement that I was able to find. No AUM, and all of their funds are vanguard, mostly admiral share. Employer side cost is reasonable, like $500 initial and then $5/participant/mo.

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Re: Why don't 401K managers fight on our behalf?

Post by MrPotatoHead » Tue Mar 06, 2018 11:42 pm

goblue100 wrote:
Tue Mar 06, 2018 8:23 am
Not everybody is taking it, my wife worked at Fujitsu and she just got a class action suit in the mail. Fujitsu is being sued for not providing enough low cost fund options. For the record, Fidelity was the 401k provider and I didn't think the fund selection was that bad, but we filled out the paperwork.
Other law suits:
https://www.benefitspro.com/2017/08/30/ ... 0206081854

Fujitsu:
http://www.pionline.com/article/2017121 ... 14-million
Oh goodie. First of all Corporations moved away from defined benefit plans to 401ks to dissolve their financial liability. Remember corporations are under no obligation to provide any retirement plan. A few ore nitwit lawsuits like this and companies may stop offering any form of retirement plan. Then it will be wonderful for everyone. We can all then run on the really well run SS system

mchriton
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Re: Why don't 401K managers fight on our behalf?

Post by mchriton » Wed Mar 07, 2018 2:01 am

MrPotatoHead wrote:
Tue Mar 06, 2018 11:42 pm
Oh goodie. First of all Corporations moved away from defined benefit plans to 401ks to dissolve their financial liability. Remember corporations are under no obligation to provide any retirement plan. A few ore nitwit lawsuits like this and companies may stop offering any form of retirement plan. Then it will be wonderful for everyone. We can all then run on the really well run SS system
This is the best possible outcome. Take away retirement planning from companies and put the individual in control. Imagine if IRA/Roth IRA limits were increased and 401ks were abolished and perhaps some mechanism continued for company match into your personal IRA. Everyone could signup for quality plan at vanguard or similar.

Today's system is a complete mess, companies have no idea what they are doing; high fee financial service company's bribe their way in; we have inconsistent benefits depending on how savvy the company is (e.g.: whether mega backdoor roth supported or not); depending on position in company you have other tools such as SEP, deferred comp, etc. Status quo is complicated for individuals to manage 401k, ira, etc, etc.

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jharkin
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Re: Why don't 401K managers fight on our behalf?

Post by jharkin » Wed Mar 07, 2018 4:00 pm

mchriton wrote:
Wed Mar 07, 2018 2:01 am
MrPotatoHead wrote:
Tue Mar 06, 2018 11:42 pm
Oh goodie. First of all Corporations moved away from defined benefit plans to 401ks to dissolve their financial liability. Remember corporations are under no obligation to provide any retirement plan. A few ore nitwit lawsuits like this and companies may stop offering any form of retirement plan. Then it will be wonderful for everyone. We can all then run on the really well run SS system
This is the best possible outcome. Take away retirement planning from companies and put the individual in control. Imagine if IRA/Roth IRA limits were increased and 401ks were abolished and perhaps some mechanism continued for company match into your personal IRA. Everyone could signup for quality plan at vanguard or similar.

Today's system is a complete mess, companies have no idea what they are doing; high fee financial service company's bribe their way in; we have inconsistent benefits depending on how savvy the company is (e.g.: whether mega backdoor roth supported or not); depending on position in company you have other tools such as SEP, deferred comp, etc. Status quo is complicated for individuals to manage 401k, ira, etc, etc.

Before mandatory enrollment, lots of Americans did not even make use of 401ks they had - where signing up was as simple as checking a box on the new hire paperwork. You really think these same people will take the effort to go to Fidelity, Schwab, or Vanguard and go though all the effort of setting up an account, choosing investments, figuring out tax implications?

This wont work any better than 401ks unless we educate people.

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Re: Why don't 401K managers fight on our behalf?

Post by Engineer250 » Wed Mar 07, 2018 8:05 pm

SteelyEyed wrote:
Tue Mar 06, 2018 9:35 pm
The "401k manager" is usually somebody in the HR department. Have you ever spoken to this person? In my experience, it is assigned to a person as a collateral duty with few big-picture responsibilities regarding the plan. Most of their time is spent on completely unrelated work. When they do perform 401-related tasks, it is more like correcting administrative errors. You probably know more than they do. It is quite possible that they do not know what a good plan looks like.
I work for a good sized company and this is how it is for us. Our fund choices are pretty poor. Vanguard is the administrator and we have their target date funds and Russell funds but the international and bond funds in the plan are actively managed and expensive. I emailed this person in HR only to get a response back that my company pays a third party (!) as a retirement consultant and they are the ones responsible for picking the funds. The response I got back was some canned "how we choose our funds" BS from them. Probably some long-standing financial relationship between them and the family that owns the company. It's a shame, but I guess at least I tried.
Where the tides of fortune take us, no man can know.

JoeRetire
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Re: Why don't 401K managers fight on our behalf?

Post by JoeRetire » Wed Mar 07, 2018 8:26 pm

Ron Scott wrote:
Tue Mar 06, 2018 7:39 am
Have you ever heard of a 401K manager who sued a fund for poor performance or misrepresentation?
What do you mean by "401k manager"? Do you mean the in-house or outsourced administrator of your company's 401k plan? Or something else?

I have heard of employees suing their company for bad 401k plans.
But I've not heard of a "401k manager" suing a fund.

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Re: Why don't 401K managers fight on our behalf?

Post by Ron Scott » Thu Mar 08, 2018 12:49 pm

JoeRetire wrote:
Wed Mar 07, 2018 8:26 pm
Ron Scott wrote:
Tue Mar 06, 2018 7:39 am
Have you ever heard of a 401K manager who sued a fund for poor performance or misrepresentation?
What do you mean by "401k manager"?
The 401K manager is the firm that administers the program for another company's employees. The Principal for example.

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Re: Why don't 401K managers fight on our behalf?

Post by JoeRetire » Thu Mar 08, 2018 2:32 pm

Ron Scott wrote:
Thu Mar 08, 2018 12:49 pm
JoeRetire wrote:
Wed Mar 07, 2018 8:26 pm
Ron Scott wrote:
Tue Mar 06, 2018 7:39 am
Have you ever heard of a 401K manager who sued a fund for poor performance or misrepresentation?
What do you mean by "401k manager"?
The 401K manager is the firm that administers the program for another company's employees. The Principal for example.
I've never heard of that sort of firm suing a fund company for poor returns. I can't imagine how they could be successful in such a lawsuit.

Ron Scott
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Re: Why don't 401K managers fight on our behalf?

Post by Ron Scott » Sun Mar 11, 2018 10:39 am

JoeRetire wrote:
Thu Mar 08, 2018 2:32 pm
Ron Scott wrote:
Thu Mar 08, 2018 12:49 pm
JoeRetire wrote:
Wed Mar 07, 2018 8:26 pm
Ron Scott wrote:
Tue Mar 06, 2018 7:39 am
Have you ever heard of a 401K manager who sued a fund for poor performance or misrepresentation?
What do you mean by "401k manager"?
The 401K manager is the firm that administers the program for another company's employees. The Principal for example.
I've never heard of that sort of firm suing a fund company for poor returns. I can't imagine how they could be successful in such a lawsuit.
Perhaps a lawsuit for poor returns is a stretch. How about getting the fund management fired and replaced?

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Re: Why don't 401K managers fight on our behalf?

Post by JoeRetire » Mon Mar 12, 2018 12:14 pm

Ron Scott wrote:
Sun Mar 11, 2018 10:39 am
JoeRetire wrote:
Thu Mar 08, 2018 2:32 pm
Ron Scott wrote:
Thu Mar 08, 2018 12:49 pm
JoeRetire wrote:
Wed Mar 07, 2018 8:26 pm
Ron Scott wrote:
Tue Mar 06, 2018 7:39 am
Have you ever heard of a 401K manager who sued a fund for poor performance or misrepresentation?
What do you mean by "401k manager"?
The 401K manager is the firm that administers the program for another company's employees. The Principal for example.
I've never heard of that sort of firm suing a fund company for poor returns. I can't imagine how they could be successful in such a lawsuit.
Perhaps a lawsuit for poor returns is a stretch. How about getting the fund management fired and replaced?
Even more of a stretch. The 401k manager would just choose a different fund.

Ron Scott
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Re: Why don't 401K managers fight on our behalf?

Post by Ron Scott » Mon Mar 12, 2018 1:35 pm

JoeRetire wrote:
Mon Mar 12, 2018 12:14 pm
Ron Scott wrote:
Sun Mar 11, 2018 10:39 am
JoeRetire wrote:
Thu Mar 08, 2018 2:32 pm
Ron Scott wrote:
Thu Mar 08, 2018 12:49 pm
JoeRetire wrote:
Wed Mar 07, 2018 8:26 pm


What do you mean by "401k manager"?
The 401K manager is the firm that administers the program for another company's employees. The Principal for example.
I've never heard of that sort of firm suing a fund company for poor returns. I can't imagine how they could be successful in such a lawsuit.
Perhaps a lawsuit for poor returns is a stretch. How about getting the fund management fired and replaced?
Even more of a stretch. The 401k manager would just choose a different fund.
That's kind of the original point. If you're a 401K management firm you really don't give a damn about employees' returns. You can always choose the simple route and dump a fund for a new one, like brokerage houses fold over losing funds into new ones. Always sidestepping failure and never getting your hands dirty to deliver success.

The comparison in the article to pensions like Calpers is a good one. They have skin in the game, whereas the 401K industry is just a marketing machine that treats employee investors as dupes.

To rephrase the question: Where is the Calpers for an employee investor in a 401K?

jalbert
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Re: Why don't 401K managers fight on our behalf?

Post by jalbert » Mon Mar 12, 2018 1:53 pm

Smaller plans struggle to provide low cost options because there isn't the asset level to cover admin costs with expense ratios at or near fund provider ERs. Admin costs can be covered by the employer, or passed on to employees through extra fees wrapped into the ER.

Where things get predatory is when the employer hires a consultant to be paid by employees through an ER add-on to design the plan. Then, the consultant has a conflict of interest because high fee fund options typically include 12-b1 fees or other kickbacks to the consultant who then is incentivized to select these high fee options. This results in substantial ER flowing to the consultant as a consulting fee for their "expertise", which is just expertise in selecting funds that benefit the consultant in this manner.
Risk is not a guarantor of return.

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Re: Why don't 401K managers fight on our behalf?

Post by JoeRetire » Mon Mar 12, 2018 2:16 pm

Ron Scott wrote:
Mon Mar 12, 2018 1:35 pm
That's kind of the original point. If you're a 401K management firm you really don't give a damn about employees' returns. You can always choose the simple route and dump a fund for a new one, like brokerage houses fold over losing funds into new ones. Always sidestepping failure and never getting your hands dirty to deliver success.
To be fair, a 401k management firm that does a poor job risks getting dumped the next time the plan is up for renewal.
The company has a fiduciary responsibility to its employees to make sure they choose a good 401k plan (and hence management firm) on behalf of its employees. Employers can be sued (and have been) for failure to live up to that responsibility.
The comparison in the article to pensions like Calpers is a good one. They have skin in the game, whereas the 401K industry is just a marketing machine that treats employee investors as dupes.

To rephrase the question: Where is the Calpers for an employee investor in a 401K?
I'm not sure I'd use the word "dupes".
Still, the shift for most folks from pensions to 401ks has mean the burden of risk has shifted from employer to emplyoee.

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Re: Why don't 401K managers fight on our behalf?

Post by Ron Scott » Mon Mar 12, 2018 9:48 pm

JoeRetire wrote:
Mon Mar 12, 2018 2:16 pm
Ron Scott wrote:
Mon Mar 12, 2018 1:35 pm

The comparison in the article to pensions like Calpers is a good one. They have skin in the game, whereas the 401K industry is just a marketing machine that treats employee investors as dupes.

To rephrase the question: Where is the Calpers for an employee investor in a 401K?
I'm not sure I'd use the word "dupes".
Still, the shift for most folks from pensions to 401ks has mean the burden of risk has shifted from employer to emplyoee.
I like the word dupe because it pushes the issue, and I like your word, burden, too.

So, to close the loop on this, one is left to wonder if there is any way--any imaginative approach--that 401Ks could have been structured or might change to ensure the employee gets a better chance than the ongoing parade of active funds most see in a couple decades of investing? Or one could ask, who benefits from the existing regulations?

I'll bet the contents of an active fund manager's fat wallet--a portion of which will end up as campaign contributions--we'll see no change going forward...

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Re: Why don't 401K managers fight on our behalf?

Post by LadyGeek » Mon Mar 12, 2018 10:28 pm

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