[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!
My wife – a teacher – always has cute sayings that she tells her class. One of them includes “You get what you get and you don’t pitch a fit.”
You can imagine, then, how happy it makes her that I am always the person who speaks up when something is wrong. “Why can’t you just let someone else do it.” My response has always been the same. “Because life has taught me that no one else ever will speak up.”
Unfortunately, so much of what happens in the work place from patient care to retirement plans is driven by fear. Fear of retribution. Fear of judgement. Fear of things getting worse than they currently are.
Tim, I completely agree with you that people have to speak up when something is wrong, even when it comes to their 401k/403B choices. Fortunately, my employer’s 403B is quite good with low-cost Vanguard index funds as primary choices in our funds. We also have a solid matching/contribution from our employer. That said, I’d be up talking to someone in a heart beat if that weren’t the case. Truth be told, most people wouldn’t even be able to recognize when a plan isn’t good in the first place. Hard to point out a problem when you don’t realize that there is one. Part of this is a financial literacy problem for sure.
TPP
This is such a coincidence. I just had a discussion with Kped yesterday about how to petition a 401k plan to change when he wrote a post about how his 401k plan did not have great options.
I actually went through this process a few years ago. I had the advantage that I was a trustee on the pension committee.
Like many I just accepted the 401k plan as is, as the “higher ups” must know what they are doing. We had minimal exposure to index funds in the plan originally with higher expense ratio offerings/actively managed funds.
Once I had my eyes opened to passive index funds, I knew I had to make my voice heard among the committee members and implement a change. There actually was some resistance from the financial advisor that was helping us with the design of the plan. He mentioned things like, “you don’t want to give too many choices to the participants” otherwise there might be paralysis by analysis. He also mentioned that even though there were high expense ratios in some plans (such as a Columbia fund we had), those funds gave back a certain % back so the expense ratio was not as high as it would seem (however after more digging, I found that the % returned did not go back into the investors funds directly, but instead was used to decrease the overall plan’s admin fees).
I certainly did not want to use my limited money I was allowed to put in to subsidize other employees retirements which was essentially what this setup was doing.
I actually made a 20 slide or so PowerPoint presentation, sent emails, even a link to an article which showed that 401k plan admin were getting successfully sued by employees because they were not offering low cost index funds.
That seemed to do the trick and now after being the squeeky wheel, our plan offers Vanguard index funds for total stock, total bond, total international and emerging markets).
The advisor still maintains that although index funds have been winning in the bull market we have had, just wait till a market correction and then active managers will shine. My response to that is that I will just buy more index shares on sale and wait for recovery.
Plans vary widely in offerings, fees, match, etc. My old plan had a Schwab option, profit sharing, good match & safe harbor contributions. Current plan luckily still has a Schwab option but no profit sharing, no safe harbor and a crappy match. In addition, I got hosed front loading my 401k this year resulting in a minimal match. This should be “trued” up at year end but not holding my breath. I have complained but with a large hospital company it falls on deaf ears.
Xrayvsn and I were talking about this yesterday. He showed me this gem.
https://www.marketwatch.com/story/401k-lawsuits-are-surging-heres-what-it-means-for-you-2018-05-09
You can do more than register a complaint. If they are a fiduciary then they are obligated to do provide quality investments.
I’ll probably take a swing at getting things changed at my institution. Thanks for the article. This along with a compound interest and fees calculator will hopefully do the trick!
While I’m sure that some of these lawsuits help to address some bad 401k options, there is ample evidence that these lawsuits are being driven by a single law firm that is primarily using them as a vehicle to enrich themselves. My company, which has an excellent 401k through Vanguard, was sued because of some very minor points. Things like fees being 0.05% higher than they could have been. My company settled the lawsuit and is paying the vast majority of the settlement fee directly into the 401k plans of the employees (minus of course the multi-million dollar payout to the lawyers).
I think it’s good to have a few lawsuits here, just enough to help employers to realize they do have a fiduciary duty and need to do what’s right in their 401(k)s. But too many lawsuits and ridiculous lawsuits, just like in malpractice, cause dumb things to happen like in your company’s case.
One dirty little secret of retirement plans is that sponsors (company executives) select the plans’ features and options, but participants (employees) pay the fees. As Xrayvsn and Kped highlight, plan sponsors expose themselves to significant fiduciary liability if they don’t regularly, say every 3 – 5 years, put the plans up for bid. Here’s another dirty little secret: company executives typically don’t know more than the self-educated White Coat reader about retirement plans. You all can make a real difference by pushing for change in a constructive way. Thanks for reading!
Any specific ideas for where to look getting competitive bids for a small private practice, maybe 20 employees? I’d like to do a lot of the legwork for my colleagues and then bring them the results. Or current plan has too few options with sky high fees. Zero education or individualizations.
American Foreigner, there are a lot of firms you can look at for small business 401k plans. Keep in mind you will want to consider both recordkeepers/third party administrators (such as Employee Fiduciary and Ubiquity) and financial advisors (like us at Aptus). Here is a blog post Tim recently put on our website that can tell you more.
https://www.aptusfinancial.com/aptus-blog/2018/9/3/great-small-business-401k-plans-are-possible-if-you-take-a-diy-approach
Thanks for the info and the article!
You bet!
The usual lower cost culprits for small practices include Litovsky asset management, Employee Fiduciary, or America’s Best 401(k). As you get larger it can make sense to start looking at places like Schwab and Vanguard. Sounds like just about anything would be an improvement for you.
I am actually going through this entire process right now for my surgical subspecialty private practice group. Great timing on the post WCI!
I am in my 2nd year of employment with this group and the 401k plan we currently have has high administrative costs, high expense ratio funds, and a poor selection of funds. The “financial advising” included is more sales than fiduciary advising. This current 401k plan has been in place with the group since 1994!
Fidelity, and in particular Vanguard, gave much more competitive bids and we will likely be transferring to one of them by end of the month. My group has 30 total employees and includes attendings, PA’s, NP’s, RN’s, and secretaries.
I am no financial guru, but reading the WCI blog for the past 4-5yrs has given me enough tools to lead this process for my group. Thnx WCI!
Wow, that’s a fantastic success story! It’s amazing how much better a plan can be after a competitive bid process. We’re so impressed by the quality of the White Coat blog and, by extension, the White Coat readers. You all can really be a force for positive change in retirement plans.
You melt my heart with that last kind comment.
Be persistent, this matters. I was employed by a multistate health organization with 25k employees. Our retirement plan had a single s&p 500 index fund with an ER of about 0.65%. All other options were active and more than 1% ER. The plan was managed by a company owned by the donor whose name was on the cancer center. I wrote letters and complained. I tried to mobilize my partners. I never made any headway or received any feedback until one day they were sued by a group of employees and ultimately settled an ERISA suit. We all got a tiny contribution from the settlement but most importantly, now have many Fidelity and DFA institutional funds to choose from.
I love the underlying belief contained in this post. If you’re not happy with something, get smart about it, and go change it. Great info!
Some sites you can check for medium to small companies 401(k)s are:
EmployeeFiduciary.com
BrightScope.com
Myubiquity.com
Lowcost401k.com
I got one changed years ago but be careful. For awhile it was questionable who was going to go….me or the 401(k)…….Gordon
Great overview and suggestions Tim and important but under-publicized topic WCI. Tip of the hat to both of you!
I was able to greatly improve the plan offered by my small employer, getting a number of Vanguard funds with admiral shares introduced to our plan giving options to cut ER of investments by .5-1+% in different asset classes. Unfortunately, the plan still had about .5% AUM administrative fees. Also of interest, while they added better (lower cost index) funds, they didn’t take out any of the more expensive actively managed funds because simplicity and low fees is not in a provider’s best interests.
Still, any improvement is important given how much money is tied up in retirement plans so I was happy I was able to influence changes.
Thanks Chris. Yes, it’s often relatively easy to get your current plan advisor to add some good low-cost, index-fund options. We find that most advisors will do that to appease the agitators, while still offering a confusing slate of expensive actively managed funds. Baby steps I suppose. In relatively small companies, the high admin costs may be unavoidable. But if you have a great plan with high participation rates and high savings rates, you can start spreading those admin costs across a growing asset base. We take pride in our track record of boosting aggregate savings into the plans we advise by 50%, which not only helps the participants prepare for retirement but also helps make the plans less expensive over time. I’m excited that the self-educated followers of the White Coat Investor [and Can I Retire Yet?] will be helping to change the many crummy plans still out there.
Yes, it’s an important topic. I hit it 2 1/2 years ago, but it’s obviously worth hitting again.
https://www.whitecoatinvestor.com/what-to-do-with-a-crummy-401k/
Great post! I am currently involved in the investment committee for my group. We were initially shocked at the funds offered (almost all with a 100 basis point or greater expense). There were even some with a load!
We formed an investment committee and directed the advisor to offer target date index funds, individual vanguard index funds, and (at the insistence of other members of the committee) some active funds.
Overall, a much better selection of funds that I can roll my previous 401k into. I guess it pays to be “the squeaky wheel that gets the oil”.
Psy-FI MD
I’ve written extensively on how group practice plans can be improved cost-effectively.
This would be a good starting point:
http://whitecoatinvestor.com/how-to-reduce-your-practice-retirement-plan-cost
Next one is specifically for group practice plans and the types of issues they face (specifically medical/dental plans):
https://www.whitecoatinvestor.com/how-to-best-group-retirement-plan/
And finally, a general article about what is important when it comes to selecting your service providers:
https://www.whitecoatinvestor.com/the-ideal-retirement-plan-for-your-practice
One tool that I find useful to compare various types of offers is a retirement plan cost comparison calculator:
https://retirementplanhub.com/retirement-plan-cost-calculator/
My recommendations are actually quite simple:
1) Hire the best ERISA 3(38) fiduciary you can find (for a fixed/flat fee) who works exclusively for the plan sponsor. A good ERISA 3(38) should be able to do the following for you:
– select competitive service providers that don’t charge any AUM fees
– select a low cost investment menu
– build a number of managed portfolios for the staff
– assist with such things as evaluating a Cash Balance plan option for the group, improving existing plan design, minimizing plan sponsor fiduciary liability (by working to convert brokerage-only plans into plans with an investment menu, for example).
2) Select the best low cost record-keeper platform with access to Vanguard/DFA funds
3) Select the best Third Party Administrator and actuary (if you have a Cash Balance plan). They should be independent from your adviser/record-keeper.
Stay clear of barebones record-keepers who don’t have the expertise to manage/administer group practice plans that are much more complex than a typical safe harbor 401k plan, and also avoid bundled providers because they don’t have your best interest in mind, and the quality of service is not there for more complex plans. There is a minimum level of service required for group practice plans, and all of this can be done cost-effectively by simply eliminating any and all asset-based fees from your plan (so that you are only paying low expense ratios for your Vanguard index funds, and nothing else).