The 401(k) is in need of a
tuneup.
Originally
designed to supplement pension plans, 401(k)s have become the primary
retirement-savings vehicle for many employees. But critics say the plans are
plagued by a variety of ills, including high fees that can eat into investment
returns, as well as certain advisers who may not have a legal obligation to
work in the best interests of plan participants.
"The system is
broken," says Monique Morrissey, an economist at the left-leaning Economic
Policy Institute in Washington. "The best way to encourage people to save
more is to give them something that will make them confident that if they put
more money away, they will have sufficient and secure retirement income."
Here
are five suggestions to strengthen the traditional 401(k).
Simplify fee disclosure
High
fees are at the root of many of the criticisms lobbed at 401(k)s.
According
to BrightScope, a San Diego analytics firm that rates retirement plans, average
total plan fees for large 401(k) plans with more than $1 billion in total
assets are about 0.34% of assets annually, or $340 a year for an account with a
$100,000 balance. However, at smaller plans with $1 million to $100 million in
assets, the average is 1.16%, or $1,160 a year. Total plan fees include various
administrative costs as well as the expenses built into the underlying
investment choices.
It can be difficult for small
businesses and plan participants to get a handle on what fees and expenses are
attached to their 401(k) plans because the numbers are often buried in the
dense, complex and lengthy disclosure documents that became the norm after the
U.S. Labor Department in 2012 required plan providers to reveal detailed
information about their services and the compensation they receive.
The
Labor Department in March proposed new rules designed to make navigation of
these documents easier, citing concern that small businesses in particular
might be having trouble.
In
addition to plan administrative costs, the expense ratios associated with
individual funds also can hurt workers' returns, which has led to calls for
simpler, easy-to-read disclosure of these expenses, too. Some have envisioned a
disclosure similar to a new car's gas-mileage label or energy-cost labels on
appliances, says John Rekenthaler, vice president of research at Morningstar
Inc.
The
left-leaning Center for American Progress, for example, wants funds to carry a
warning label explaining how high fees eat into savings, and showing how the
fund's fees compare with a group of comparable, low-fee offerings.
"The
ability to see that fee metric in a way that signals to them whether they are
buying a low-cost fund or a higher-cost fund would be incredibly
valuable," says Jennifer Erickson, the director of competitiveness and
economic growth at American Progress.
Require
plans to offer low-cost index funds
Some
critics say that along with better fee disclosure, 401(k) plans need to include
more low-cost index mutual funds and exchange-traded funds.
Click here
for the full article in the Wall Street Journal.