Ten Things Your 401K Provider Won’t Tell You, Part 1

I love Smart Money’s series, Ten Things Your [Insert Someone Here] Won’t Tell You, because it really opens your eyes to some of the shady practices of some operations you may otherwise think are being honest and above board. In the latest installment, Smart Money takes a look at 401K’s and the little things that go on that they just won’t tell you about.

1. “We’re making a mint on your 401(k) — even if you’re not.”
I think this is the most egregious of the ten things and it revolves around the fact that the provider is being paid on a percentage of the money its managing and not for their performance. A lot of their fixed costs are instead charged on a percentage basis, such as administrative costs, and while the assets may increase, the administrative (and other fixed costs) aren’t likely to increase on a one to one basis. Luckily these sort of things are coming under the scrutiny of state attorney generals, such as Eliot Spitzer of New York.

2. “You’re buying wholesale, but we’re charging you retail.”
If you buy a fund all by yourself, it’s understandable that you’ll be paying retail because you’re not talking about millions of dollars (or perhaps you are, in which case could you send some my way?). If you buy a fund through your 401k, it’s conceivable, based on how large your company is; that the administrator is moving around millions and you should get some sort of discount on the retail fees – and many times they do. The disconnect is when they pass the charges off to you, they don’t merely divide what they pay and pass it through, they charge retail fees for something they paid wholesale for. That should be illegal.

3. “No one in his right mind would buy these funds — given a choice.”
When you sign up to the 401k, you’ll likely be limited to which funds you’ll be allowed to buy. Unfortunately, sometimes this means that you get to pick from lackluster or under-performing funds because your plan administrator, someone in HR perhaps, doesn’t know what he or she is doing. Also, Smart Money warns that sometimes the funds can’t handle a huge influx of money (the reason why some funds close) because it’s harder to make the same rates when you have so much more to invest.

4. “Our ‘target-date funds’ may miss the target.”
This isn’t a 401k specific issue but one about the target-date funds themselves, some may be incorrectly allocated based on expert opinion, especially if your administrator (and not a large brokerage) sets it up. That’s not to say the big brokerages have perfect target retirement funds, it’s just that they have more minds on the problem which hopefully reduces the problem. There isn’t event agreement on allocation, I did a review of target retirement funds and found the allocations were all over the board.

5. “We offer tons of investment options. Too many, in fact…”
Just as #3 (too few funds) can be brutal, too many options muddy the waters. A survey showed that the average number of funds in a 401k was 19, but that 10-12 was the ideal number, anymore and the investor was “paralyzed.”

Things six through twelve will be forthcoming.

Source: Yahoo Finance



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5 responses to “Ten Things Your 401K Provider Won’t Tell You, Part 1”

  1. I am sorry, but I (respectfully) disagree with many of the points you make in this article. You clearly mean well, but as someone who participates in my company’s 401(k) management plan I think you misunderstand some of the elements in the 401(k) process.

    Yes, there are serious problems with 401(k) plans – such as excessive fees, poor fund choices and so-called “wrap charges”, but unless you are working for a seriously mean company your company is probably not charging you more for your investments than it is being charges yourself.

    Many 401(k) administrators lack knowledge and training. But few if any would set up their own target retirement accounts. If nothing else, the liability that they would be exposed to would deter them from doing so.

    I will write a post about some of the issues with 401(k)s in my own blog in the next few days. In the mean time, you may be interested to check out this recent post about a recent survey regarding 401(k) that I conducted in my company.

    BTW, I am a regular reader of your blog and enjoy it a great deal.

  2. Weekly Roundup – 03/23/07…

    Here?s a quick look at some of the articles that caught my eye over the past week?

    Jim writes about the possibility that no-free balance transfers from Citi might be coming to an end. So… There’s not better time to apply for a 0% bala…

  3. retirehappy

    Hi Shadox,
    I was merely summarizing the 10 things articles and adding a little commentary of my own, I would think that you’d be hard pressed to find a 401k provider that suffered from ALL of these failings but it’s important to see what aspects your plan could be slipping towards. I agree with you in that no one plan is THIS bad but the potential is there and consumers need to be educated on where they can be scammed, even if they never will be scammed.

    Thanks for reading!

  4. Ray


    How about this one: the provider says they cut checks for return of excess contributions on March 14 and withdrew them from participants’ accounts on that date. They say they mailed them on the 16th. As of the 31st of March none of the partcipants has received a check.

    Two problems: the provider (say, for example, Payflex Retirememt Services – not quite their real name) has use of the funds for at least an extra two weeks, denying the participants any earnings during that time, and the funds are taxable to the recipients for 2006 because they took them out of the accounts pre-March 15, 2007 – the cutoff date – irrespective of when received.

    I think this kind of abuse of “float” by payroll services should be preventable by some means – what could someone do aside from changing providers?


  5. My 403b plan takes my money on payday and it may take over two weeks for the funds to hit my account. The number of days varies widely. Another strange observation is the funds seem to get invested at Fidelity only on market peaks and or days with upward share price movement, meaning less shares issued per dollar contributed. What’s the chance of that if it is “random”.