How to Make Changes to a Bad 401(k)

[Editor's Note: The following post was submitted by Tim Quillin, CFA, flat fee financial planner/advisor, and Partner at Aptus Financial. Aptus is based in Little Rock, AR and has been a long-time advertiser of WCI. Some of you might remember Aptus founder, Sarah Catherine Gutierrez, CFP, who was one of our top-rated speakers at the 2018 WCI Financial Literacy and Wellness Conference in Park City, UT.]

Do You Have a Crummy 401(k) or 403(b) Plan?

In the White Coat Investor’s Podcast #44 “Complicated Aspects of 401(k)s,” Dr. Dahle fields a question “from a doc who’s wondering [how to change] his crummy 401(k) that his employer offers.” Unfortunately, our experience suggests that this doctor is not alone. There’s a pretty good chance your employer retirement plan…well…sucks. Sorry, maybe that’s a bit too blunt and a tad crude. Ahem. There’s a very good chance that your retirement plan has high, hidden fees, poor investment choices, and conflicted or non-existent financial education. There’s an even better chance that nothing will change unless you make your voice heard. With a little self-education and a proactive, cooperative approach, you can help make your plan better.

Changing the Status Quo

Through our financial planning with physicians, we’ve seen a lot of your qualified retirement plans…the good, the bad and the ugly. Interestingly, most of our clients don’t really consider whether their employer plan is good or bad. You get what you get and you don’t get upset, right? Given the tax advantages and easy payroll deductions, we recommend saving into even relatively bad 401(k)s and 403(b)s. Your employer is not aiming for a crappy plan, though. More likely, the individuals running the plan just don’t know it’s lousy or at least don’t think it’s bad enough to justify a change.

Perhaps the primary reasons you are stuck with a bad plan are inertia—“if it ain’t broke, don’t fix it”—and entrenched, long-term relationships—“our current provider does a great job.” Change is hard and typically there’s additional workload to support a transition, especially for one or two people that help administer the plan and manage related payroll functions.

There are other more troubling reasons that your employer might resist change. The current advisor might be a donor to your employer or a related foundation. Participants, in that case, are unwittingly donors themselves because they are paying above-market fees to the advisor that are funneled back into donations.  The current advisor might be a customer, supplier, strategic partner or personal friend. Again, participants then are unknowingly paying to maintain that relationship. We’ve even seen situations where the employer was reluctant to offer a better plan, because it knew savings rates would increase and they would have to contribute more in matching contributions!

Educating Yourself as the in-house 401(k) or 403(b) Expert

Regardless of the reason, the pull of the status quo is strong. You—yes, you specifically—have to be the squeaky wheel. In order to offer constructive criticism, you first have to educate yourself on how your retirement plan works. As my father used to say, in the land of the blind the one eye man is king. You may be surprised how little homework you need to do to become the in-house “expert” on 401(k)s and 403(b)s.

Terminology to understand:

ERISA

The Employee Retirement Income Security Act of 1974 (ERISA) is a federal law that sets standards for most pension plans. Some types of 403(b) plans are exempt from ERISA, including governmental plans, church plans and some tax-exempt organization plans that meet certain Department of Labor requirements.

Sponsor

Your employer offering the plan.

Participant(s)

You and your fellow employees.

Trustee(s) and Administrator(s)

Individuals within the company responsible for management and administration of the plan. The individuals accept a fiduciary duty to run the plan solely in the interest of participants.

Recordkeeper/Third Party Administrator (TPA)/Custodian

Outside providers of plan administration services. These duties are often bundled together and performed by one company. Retirement plan recordkeepers include Fidelity, TIAA, Empower, Vanguard, Voya, Transamerica, VALIC, Voya, John Hancock, Principal, American Funds, Paychex, ADP and Ascensus.

Investment Funds

Outside provider of investment choices for the plan. These funds are often affiliated with the recordkeepers. Large investment fund companies include Vanguard, Fidelity, American Funds, T. Rowe Price, BlackRock and PIMCO.

Advisor

Outside provider of investment advice and education to both sponsors and participants. As defined in Section 3 of ERISA, the advisor can be a 3(21) fiduciary, which provides investment recommendations, 3(38) fiduciary, which takes more complete responsibility for investment choices, or non-fiduciary.

6 Things You Can Do To Get a Better Retirement Plan In Place

1) “Unbundle” the plan, if necessary, to discover costs

There are 3 primary hands in the retirement plan cookie jar: recordkeepers, investment funds, and advisors. Often, and especially in lousy plans, all the costs are bundled into the fund expense ratios. One key to reducing fees is unbundling the plan to get a clear view of each.

2) Seek competitive bids

Recordkeepers typically charge a per participant fee and will often lower the fee if you seek competitive bids. The recordkeepers will vary based on the number of participants, from perhaps $125 per participant for a company with 50 employees to closer to $50 per participant for a company with more than 5,000 employees.

3) Select passively-managed index funds and keep fund choices simple

You can minimize investment fund fees—typically stated as expense ratios—by selecting passively-managed index funds, which are appropriate choices for most individual investors. In terms of fund choices, keep it simple. A full slate of target retirement date index funds is often the best default choice for employees. A line-up of perhaps a dozen other index funds should be sufficient to support more tailored portfolios. The expense ratios should be in the 0.03% to 0.15% range, even for relatively small companies.

4) Evaluate advisor fees on a per-employee basis from conflict-free advisors

While advisor fees are often stated as a percentage of plan assets, the more common-sense way to evaluate the fees is on a per-employee basis and they should mostly reflect time spent training, educating and counseling employees. An important, but often overlooked, element of a high-quality 401(k) plan is tailored, individualized financial wellness education from conflict-free advisors.

5) Persuasion (offer to help)

Armed with your new knowledge about retirement plans, approach an administrator or trustee and offer to help in any way you can. If there’s an investment committee, offer to serve on it. If there isn’t one, offer to form it. Try to persuade the administrator and/or trustee to open up the plan to a competitive bid process and offer to help gather and evaluate proposals. At the least, you could end up with lower prices from the current provider and learn a lot about the options available in the market.

6) Grab the pitchfork and complain!

We were recently talking to the administrator of a large employer plan with high, hidden fees, poor investment choices and no financial education. The administrator was reluctant to even consider a bid for the plan, which he thought was pretty great. Why did he think this lousy plan was pretty great? He said, “nobody complains.” That’s the issue and that’s our challenge to you—yes, you specifically. Lead the change, grab the pitchforks and storm the castle walls.

Have you been stuck with a lousy 401(k)? Were you able to persuade administrators to change to a better option? What would you suggest to a person stuck with a bad 401(k)? Comment below!