GAO criticizes 401k disclosure
With most private-sector workers relying on the 401k as their primary retirement plan, those plans’ fees are becoming a controversial issue. When I wrote a column about 401k fees, I mentioned lawsuits on the subject by St. Louis attorney Jerome Schlichter and by New York Attorney General Eliot Spitzer, and a slow-moving Labor Department rulemaking process on fee disclosure. Now the Government Accountability Office has weighed in with a study critical of current disclosure practices.
It notes that conflicts of interest abound in the 401k industry, and aren’t always disclosed:
For example, a service provider that assists a plan sponsor in selecting investment options for the plan may also be receiving compensation from mutual fund companies for recommending their funds. The service provider may not disclose this business arrangement to the plan sponsor, and as a result, participants may have more limited investment options and pay higher fees for these options than they otherwise would.
The GAO recommends that Congress pass a law requiring explicit disclosure of such revenue-sharing arrangements. It also says plan sponsors should be required “to disclose fee information on each 401(k) investment option to participants in a way that facilitates comparison among the options.”
By the way, if you think this plan is a “free” benefit offered by your employer, you might want to think again. Among plans with more than 5,000 employees, workers paid for investment costs 71.5 percent of the time, and for recordkeeping costs 50 percent of the time.
Here at the Post-Dispatch, we have a 401k with decent choices and low fees that are pretty well disclosed (although I don’t know whether the plan provider has revenue-sharing arrangements with any of the funds). How about your 401k (or 403b, if you work for a non-profit organization)? Has your employer done a good job of keeping costs low, or do you even know what those costs are?
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David Nicklaus has covered St. Louis business for more than 25 years. His column appears three days a week on the Post-Dispatch business page. 
Whenever the government creates a program that offers tax breaks to individual investors (such as a 401(k) account, a 529 college savings account, or tax deferred annuity accounts) many firms in the financial services industry will attempt to extract a disproportionate share of the tax savings to individuals, by charging uncompetitively high administrative fees. Investors who are “semi-sophisticated” recognize that their after-tax returns are improved by participating in these plans, BUT don’t recognize that their returns would be substantially greater if their accounts were being managed by firms charging competitive fees, such as Vanguard, TIAA-CREF, and T. Rowe Price.
From the perspective of financing national and state government, the tax breaks that are utilized by individual investors reduce government revenues. Given a particular level of government spending, this means that the requisite revenues must be made up by taxing essentially the same people (i.e., the American public) in other ways. One of the unfortunate net effects of the overall system is to allocate too much wealth to financial firms that provide unexceptional financial management at uncompetitively high prices.
I don’t advocate eliminating tax-advantaged investment accounts, but expanding them further by “privatizing” Social Security would compound the problem of the loss of real wealth to financial paper-shuffling. Expanding the financial/economic literacy of people in their roles as investors, voters, and taxpayers is the best approach, but it’s tough enough to educate people without having to overcome the sales hype of “financial professionals” getting rich by selling over-priced “financial products” to them.
It’s too bad that this blog is apparently not followed by more people. Hopefully, they read David’s column in the Post (especially in preference to the editorial page).
More choice would be nice. Because of the nature of the economy the last 30 years, I have have changed jobs and in some cases careers a few times and each time have kept my rollover IRA seperate from the 401K. In all that time, except for the first 2 years, the roll over has outperformed the 401 in real dollars. The dismal choice of funds in the 401K (the current one being the worst so far), have been a factor, and so have the fees; but I think the biggest reason is the funds themselves perform so dismally verses the even the market averages. High fees for the worst performance. This consumer has made his choice. Investor, educate thyself!
When you see the outrageous profits and bonuses on Wall Street, you know all that money has to come from somewhere. It’s coming from all the 401k money flooding into Wall Street. Unfortunately, very little trickles back into the individual investor’s account. With Elliot Spitzer gone and the SEC and Treasury headed by Wall Street insiders, who’s minding these people? The GAO is great for telling us what’s wrong but they’re powerless to stop it.