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Stuck in a Moment: The 401(k) Market

Everyone admits defined contribution (DC) plans were never designed to be the default retirement vehicle. But here we are. For the masses—no, those lucky enough to have one—DC plans are the default.

When will we act for an effective retirement system? Defined benefit plans are essentially gone. The Social Security system is questionable. Congressmen are talking about removing the DC-plan tax deduction.

A continual stream of 401(k) lawsuits charging excessive fees is hitting headlines, with big-name companies, such as American Airlines, Caterpillar, Lockheed Martin, and Verizon—and even firms in financial services, such as Nationwide, TIAA, Putnam, and Fidelity. Some cases are won; others are lost. The activity is demanding a fix to an infrastructure and a regulatory parameter that need improvement, transparency, and universal accessibility. Some may call the lawyers “ambulance chasers.” I call them reveille.

The uncertain U.S. Department of Labor (DOL) fiduciary rule addresses 401(k) rollovers to individual retirement accounts. However, there’s much more to be done for small-business access to competitive rate plans. Some plans charge 0.91% for index funds that could be had at Vanguard for 0.15%. Often, DC plans do not provide access to ever-popular low-cost exchange-traded funds or self-directed investing. Annuities, a necessity in retirement planning, are often nonexistent as a DC-plan option. Some plans require revenue-sharing payments that charge for a financial advisor the individual does not use or choose.

Large sponsor firms can wrestle fees with providers, but small to midsize companies generally cannot. A “multiple employer” 401(k) plan, in which a single 401(k) plan is jointly sponsored by several unrelated employers, allows smaller firms to join forces and share the costs of investments and administrative services, but it has limited take-up relative to capacity because of conflicts between DOL and Internal Revenue Service rulings. Under current regulations, employer firms often fear liability issues. In the end, employees may pay more and lack access to product options and financial advice of their choosing.

U.S. DC plans should be portable and independent of employers, like Australian superannuation funds. The U.S. DC-plan retirement market is stuck in a moment it most certainly has the capacity to step out of if congressional time is spent on what is important.