My Sunday Washington Post Business Section column is out. This morning, we look at the 401k.

The print version headline was What’s the problem with 401(k)s? You while the online version was There’s nothing wrong with 401(k)s, except the players involved.

Here’s an excerpt from the column:

“What’s wrong with these plans? Human behavior, which has managed to turn a relatively simple idea into a complex, overpriced, underperforming mess. Returns have lagged behind a myriad of asset classes doing exceptionally well over the long haul.

The solution is not very difficult: Simplify the plans, reduce the fees, make enrollment automatic and get out of the way.

To understand how to do this better, consider the three parties to any tax-deferred retirement plan, and what each gets out of it: the employer, the employee and the investment-management firm.”

I also got to throw in a snarky comment about Tim Armstrong’s distressed baby foolishness:

“The employer gets a low-cost compensation tool. Nearly all companies — the exception being AOL, which seemingly uses its 401(k) plan to discourage people from working there — use these plans to attract and retain high-quality employees . . .”

The entire column is worth the read . . .


There’s nothing wrong with 401(k)s, except the players involved
Barry Ritholtz
Washington Post, March 9, 2014   http://wapo.st/1cIBkAe

Category: 401(k), Investing, Psychology

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

28 Responses to “401ks Are Not Broken, You Are”

  1. chartist says:

    What I am curious to know is it legal for a fund to reimburse a company a portion of the custodial fee? And then could the company just keep the money for itself? Recently, a large Wall St. company came to my company to talk about 401Ks. They said, bring us your other 401Ks you may have that way you’ll have just one place to track your money. I was always suspicious that the money management firms would arrange a kick back to the company in exchange for switching money management firms and it would all be legal for the company to merely keep the money. I know my company switched money management firms this year, for reasons unknown to me.

  2. rd says:


    I have been in several 401k plans since the mid-80s. The early plans were about one-third of the way to your ideal. We didn’t have egregious fees with front-end loads etc. like some plans, but fund expenses were typically at least 1%.

    Today, I have seen a lot of improvements and my current plan is about 80% of the way. 100% would be more low-cost index funds and Target Date funds with expenses less than 0.3% instead of 0.5% – 0.6%.

    Most of the major shifts seem to be driven by the periodic changes in the laws and regulations governing the 401ks. I wouldn’t say it has been an area where the private sector has led the government in coming up with improvements, instead it has been the other way around similar to most areas where profit is privatized and future losses are socialized (poor people in retirement).

    Hopefully, one day, companies will realize that their 401k participants today will be their customers after they retire using those 401k savings to buy their products and services far in the future.

  3. Not long ago, workers actually got “defined-benefit” plans. But they were expensive, and most companies long ago ended them. Hence, the modern “defined contribution” plan.

    Were they really that expensive? Or was part of it that companies, and especially governments, would never properly fund them? That’s not the whole story but part of it anyway, I thought.

    • No, they were expensive — especially if you did not properly fund them in the first place

      • James Shannon says:

        ERISA allowed these plans to use an 8.5% discount rate. If the government / IRS had mandated a 4% rate there would not be the problem. ALL DBP plans in the entire US were being underfunded and none of those plans should have ever been allowed to invest in anything other than US Debt instruments!
        Likewise 401k’s yet another example of a “benefit” turned into one huge fraud upon the employee.
        The “Market” is clearly a Ponzi Scheme and anyone with an MBA in Finance should have learned that truth when going to graduate school.

  4. hammerandtong2001 says:

    Yes. Agreed.

    But also this: a big part of the return in a 401K comes from the employer match – and these rates are highly variable. Some companies are generous, some aren’t. More and more firms are a now distributing the matching funds at year end, disqualifying employees who left the firm during the year from that year’s matching amounts.

    Over the course of a very long tenure at a big firm with a generous dollar for dollar match on the first 5% of comp applied to my IRA, I calculate the total value of the account includes over 1/3 from the match alone.

    That’s a big deal.

  5. Justafed says:

    So as far as I have been able to determine, the very best 401(k) plan in the world is not actually technically a 401(k), but the near-clone that is the Thrift Savings Plan (TSP) for federal employees. You want low fees? Check. Limited and essentially all indexed options? Check. Target date funds? Yup. A non-embarrassing employer match? Yes, indeed. The only negative about it is the default allocation, which is all-in on government bonds (the so-called “G” Fund). But once you fix that, it’s pretty much dialamatic and awesome. Also pretty much infinitely scalable.

    Of course, that makes it very threatening to some people, and nobody has ever made serious progress on a proposal (which would be quite doable) to have non-Feds “buy into” the system. As a federal employee, I am painfully aware of some of the oddities and inefficiencies of the system, but the TSP program is certainly one place where the federal government got it right.

    Now, there is one other mild issue with TSP, which is that most feds do not have any idea how good a deal it is, so you don’t see contribution rates or amounts anywhere near as high a level as they “should” be, which is a problem shared by all of the voluntary retirement saving vehicles. It might be difficult to make TSP mandatory, but you could make people sign off every year that they make a contribution less than that which would plausibly lead them to their stated retirement goals, and maybe see some movement in the right direction.

    • rd says:

      We will see a universal TSP in the US at about the same time we see a single payer health insurance system.

      The private sector is much better at providing both of those with better options and at lower prices than the government, so your information about the TSP must be erroneous.

    • Iamthe50percent says:

      Like you, I am in TSP. I’m a postal worker. Perhaps G fund should be totally eliminated. Many of my co-workers were so traumatized by the crash that they are still 100% in G fund.

      For those who don’t know. G fund is a treasury bond fund guaranteed to never lose. It’s currently paying 2.03% for the trailing twelve months. S fund, the small cap fund, has yielded 32.45% for the trailing twelve months and 10.43% for the trailing ten years. See more at http://www.tsp.gov

      I suggested to my state rep that Illinois investigate putting their state pension funds into TSP. With our senior Senator as Senate Whip, it should be doable. But unfortunately, it seems our politicians prefer to invest in murky investments managed by politically connected managers. Perhaps it’s the same with some companies. They have crappy choices and high fees because someone is getting a kickback.

      • armyhokie88 says:

        Why would you ever want to replace a bond fund, GUARANTEED, never to lose money (nominally)?
        You might want to add a diversified bond fund such as AGG, but AGG is almost assuredly GUARANTEED to lose “Nominally” at some point in time for some duration.

      • Iamthe50percent says:

        Why? Did you read 2.03%? It’s a guaranteed loser by the time you retire. Look at the site, the history of all the funds is there.

        The ‘F’ fund tracks AGG very closely. It’s a loser too, right now. The only place to be is stocks right now because it’s the only thing that MIGHT make money.

  6. willid3 says:

    well i can see that a lot of employees probably dont get a good return based on what they do in their 401k. but then its not like they have a lot of time to deal it with much (for some reason they are much more likely to be busy at work, and its a spare time time thing, if there is any. and its not like employees are likely to be all that good at investing). and expecting employers to actually do much with these to help them is a bit unreal. they only like them because they are cheap, and for them, a lot better than a pension. but then a lot of employers dont even both with them either. and expecting much out of the vendors is also a stretch. their interests are to make as money as they can. producing a good result isnt in their requirements. but then maybe requiring some sort of responsibility on all parties might be better than now. even with the fees being published (do they require them all to be? dont really know). and lots of companies are on that band wagon to do a once a year contribution (if they do that). some wait till the following year instead of December. makes one wonder just how much longer employers will continue to offer any retirement program at all (but that only applies to regular employees. executives still have their pensions and 401ks)

    • rd says:

      Actually ERISA requires that lower level employees get pension and 401k benefits if higher level employees get them. However, the move towards much, much higher executive compensation, including huge awards of stock options outside of ERISA plans, means that the pensions and 401ks are largely irrelevant to the top corporate echelon in large corporations. That, as much as anything, is one of the reasons that ERISA plans have been the subject to corporate cost-cutting.

  7. BR,

    How this issue be broached without countenancing the fact that the offerings, within 401(k) programs, are “Long-only” and/or the only was to hedge (insure) that Asset is in a different, usually Taxable, Account?

    past that, from the WaPo Comments..

    3/7/2014 12:53 PM EST
    Mr. Ritholtz were you serious or was this piece some serious snark? You’ve accurately identified the root causes but you’re hopelessly niave if you think companies have the long term interests of their employees in mind if only we asked nicely.

    It seems to me that employers only wish to do the bare minimum required to keep and retain employees at the lowest scale pay possible. Bad 401k plans are part of the strategy — they are cheap to offer to employees so you have the illusion of bennies, good 401k plans with per pay period matching cost the companies more money than they are willing to fork over for the most part.

    If you think AOL was an outlier, got news for you, my last three previous employers did the same trick of once-yearly contributions and in each case I was cheated out of at least one year’s contribution due to timing of moving me between contract primes and subs. Oh yea workers did ask nicely for better and once the laughter died down, the best workers including myself ditched the companies for greener pastures but there was a steady parade of more suckers ahem, future employees to replace us!

    The road ahead to fix 401Ks will entail federal regulation, because the coporate track record of running 401K plans clearly show that market forces cannot goad companies into providing better retirement bennies for their workers.

    our VirginiaTech-friend raises, at least, one valuable Q: “Mr. Ritholtz were you serious or was this piece some serious snark?”…

    • rd says:

      I found out about a year ago that I have a relative who has firmly bought into the “recession porn” over the past few years and has been heavily invested in 2x short funds in their self-directed IRA for much of that period. As a result, at the beginning of 2013, they had managed to lose over 50% of their account value over the course of one of the great bull markets (cyclical or secular). I don’t know what their account looks like now, but they seemed determined to “stay the course”. They are a well-compensated corporate executive, not one of the “47%”, so “sophistication” is not an issue here.

      If anything, there are too many alternatives for many of these accounts.

      • rd,

        I was, really, speaking of Hedging an existing Asset, not, necessarily, advocating making ‘Market Calls’..

        a different way to ‘see’ it..Why can’t the plan participant buy “Put” Options (in the same vehicle)?

        There seems to a lot of advocacy for ‘Index Funds/ETFs’, SPY is, certainly, one of them..

        lo, and behold, SPY has a full-fledged Options Chain..

        yet, nothing similar is offered to 401(k) di-vestors..

        these DCP schemas are, less, about Asset-Building(preservation) for the Participant, than they are about being a Fee-Generating “Font of the Eternal Bid” for the ‘Plan Manager(s)’..
        remember, your Home Owner’s Insurance Policy is, actually, a conditional Put Option..

    • Joe says:

      Nah, it makes my brain hurt to read.

      You write about how to invest you 401 funds. Good stuff. That spark ignites a firestorm of mostly prepackaged politiosophical blather with a little of genuine interest here and there. The only comment I got…. unnh…
      I almost got sucked in. The older I get, the less inclined I am to enter the fray. I think I’ll enjoy the rest of my weekend doing something else…

      See ya inna trenches Monday.

  8. mpappa says:

    Im appalled at some of the 401k options available. Lazy advisors who put them in place and never service the plan or play all types of games in choosing the same old same old funds. There should be a managed accounts option utilizing multi asset models that are low cost. I’ve yet to see them. People have little idea how to properly allocate or choose investment options never mind understand the risk of each fund.

    • Joe says:

      Yeah, but I averaged 9% a year over a decade in my 401. There are two biggest problems. Way too many people don’t know what to do with their 401s and they are not very good 401s. The first problem makes the second one moot.

  9. Hamann says:

    How about the fact that you can never know the dollar amount/yr in fees that 401k charge to you? it seems to me that when you get a service, you get a bill in dollar amount. Not some sort of vague non-transparent percentage of the money you are investing…

  10. DeDude says:

    Defined benefits are from an investment cost point of view no more expensive than a 401K plan. They have the advantage of being run by investment professionals, who are much better than the average person at making good investment choices. What has made them “expensive” from the taxpayer point of view (as in zillion of dollars underfunded) has been the lack of political courage to demand a balance between the promised benefits, annual payments to the fund and investment risk/income projections. Because funds tend to be underfunded as much as the law allows, the expenses comes in waves whenever the market change. You could also say that the defined benefit plans shifts between being inexpensive and expensive (as markets go up or down) when compared to what a similar promise would cost if purchased on the free market as a deferred annuity.

    I will second James condemnation of allowing the plans to use an 8.5% discount rate; that is what allowed them to get into trouble in the first place.

    Moving public pension plans away from defined benefits and into 401K without demanding that those people get into social security will be another disaster. Employees who don’t have the poverty insurance of social security should have similar coverage from disability and defined benefit pension plans.

    In large corporations the issue is to pretend giving good benefits but at the lowest possible cost. The 401K has much better opportunities for this type of misbehavior than defined benefits plans. You can do all kinds of playing around with vesting and delay match and high % cost funds that pay kickbacks to the employers – and >90% of the employees will not know that they have been cheated. By the time people figure it out the Wall Street Banksters that did all this to jack up the stock price for a quick profit are long gone and all the suffering (including bad reputation) will be left to pain the employees and the suckers that still own that stock (yes that would be long-term investing pension funds).

  11. bruder says:

    401Ks primarily benefit the financial services industry. The program is a bad deal for our citizens and taxpayers. The fix is easy, repeal 401K and expand contribution limits of IRAs. That way everyone is treated the same. If that’s too difficult then amend 401K to allow people to transfer assets from 401K to rollover IRAs once a year. The best way to reduce expenses is competition and IRAs offer much lower costs. 401K expenses are high because the participants have no choice, they are locked in through their employer.

    • I disagree — it benefits the three parties described in the piece, but based on the accounts I review, it seems to benefit the employees the least!

      • bruder says:

        I don’t see how it benefits the employer at all. It requires them to have responsibility for managing the program. That’s not low cost. The lowest cost compensation is cash.

        I’ve rolled over 401K assets twice. In both cases I saved approximately 0.5% a year in fees. Given the significant balances in 401Ks, compounded this adds to a very large savings. Why should employees fork over 0.5% of their savings every year for no benefit? Let them roll it over and they will have more money for retirement.

        By the way, I enjoy your work and attended Stony Brook together..

      • 1. There are economies of scale — its cheaper with more workers — but its definitely less expensive than paying equivalent salary

        2. A competitive 401k is a recruiting/retention tool

        3. Sounds like you had a pricey plan!

  12. bruder says:

    1. If IRA contribution limits were expanded the employee would still have the option of making tax deferred contributions. The employer saves because cash compensation is more efficient. If frequent IRA rollover is permitted, there is no change for the employer, just savings is fees for the employee.

    2. A higher salary is a better recruitment tool.

    3. My plans were both through small companies. According to the Society of Human Resource Management the average plan costs for small plans is 1.3% (1.08% for large plans). Compared to the Vanguard Total Stock Market Index (0.05%) yields a savings of over 1% annually.