25 September 2018

Most Americans Distrust Their 401k Plan Providers

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Do you trust your 401(k) plan provider? If you’re like most Americans, probably not.

Only 30% of Americans trust their own retirement plan provider, which is the highest point in the last five years (in 2014, that number was 26%), according to the National Association of Retirement Plan Participants’ trust and engagement survey of more than 4,500 plan participants. Another 13% said they trust financial institutions overall, and 23% said they have confidence in these institutions.

Why the distrust? Mostly, participants said they didn’t understand the fees they were paying for their retirement accounts, and thought they weren’t being told everything about those fees, said Laurie Rowley, co-founder and president of NARPP. Only 27% of Americans know how much they’re paying in 401(k) fees, according to a recent TD Ameritrade study, but high and unnecessary fees can diminish portfolio returns, thus leaving investors with less money in retirement. Large plans have an average fee below 1% while small plans are somewhere between 1.5% and 2%, but other plans can be 3.5% or more, according to a Brightscope analysis.

The consequences are dangerous for investors, Rowley said. “Low trust means investors may save at lower rates and have suboptimal savings,” she said. “A low-trust environment is hindering people’s ability to make good financial decisions.” Even if they know they have to save for their futures, Americans may be hesitant as they don’t know what to do and aren’t comfortable to work with financial institutions.

The Department of Labor attempted to combat overly high retirement account fees with its fiduciary rule, a piece of legislation from the Obama administration that argued retirement savers lose $17 billion a year to conflicted advice and unnecessary fees. The rule, which was supposed to go into effect this year, has been delayed indefinitely. The Securities and Exchange Commission is currently evaluating its own type of fiduciary rule (though some critics say it is a watered-down version of the DOL’s rule).

Litigation over 401(k) plans has surged recently. More than 100 new complaints over these accounts were filed between 2016 and 2017, the highest two-year total since 2008-09. The biggest sources of tension? Inappropriate investment choice, excessive fees and self-dealing (which is when advisers act in the own best interest instead of the client’s). There are positive consequences to these lawsuits, however, such as increased fee transparency (which could lead to lower fees). There are also neutral or negative risks, including more passive investment choices (which do not pose as much of a risk of underperforming index funds on performance or fees).

What would make Americans trust their plan providers more? A few factors, the NAARP said. Education, transparent fee information, shared relevant information about the plan or retirement savings and feeling as though the provider is acting in the participant’s best interest.

About 19% of respondents said they know how to estimate money for retirement and 21% feel comfortable planning for it. Another 19% said they understand investing principles and 30% feel comfortable managing their money. Failing to prepare for retirement can be detrimental once a person gets there. It’s never too early to start saving for retirement, but the earlier the better. Only about half of Americans expect to feel comfortable in retirement, a new Gallup report found, and one major concern is not having enough income during those retirement years.

Click here for the original article from Market Watch.

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