After the death of his beloved mother, Harry Houdini was desperate to contact her from beyond the grave with the help of psychic mediums – who claimed an ability to communicate with the dead. Mediums were very popular at the time, but it didn’t take long for Harry to discover they couldn’t do what they promised. Upset, Harry became determined to expose their lies to protect unwitting customers.
Like mediums, some 401(k) providers make false claims. Their lies can easily go unnoticed to 401(k) fiduciaries due to the highly-technical nature of 401(k) services. However, believing these lies – and hiring the provider that makes them – can trigger severe consequences. They often mask excessive 401(k) fees or a lack of expertise that can increase fiduciary liability.
If you’re a 401(k) fiduciary, identifying 401(k) provider lies is imperative to mitigating your plan liability. The good news? Most are easily debunked with some basic facts.
I’d like to channel (pun intended) Harry Houdini by exposing four of the most common lies told by 401(k) providers today.
1. Your 401(k) plan is free
Today, 401(k) provider fees can be paid directly by the plan sponsor, via participant account deduction or indirectly from plan investments. Provider fees paid from plan investments are often called “hidden fees” because their total is not reported in DOL-mandated fee disclosures or plan statements. However, they reduce participant returns like any other fee.
Over the decades, 401(k) providers have lined their pockets with hidden fees – generally under the noses of unwitting 401(k) fiduciaries. How did they do that? By telling a lie. They told 401(k) fiduciaries they could have a “free” plan by simply picking plan investments from a list of funds. In truth, these funds paid the provider hidden fees.
There is no such thing as a free 401(k) plan. Providers that claim otherwise are the most likely to sell overpriced plans.
2. I can setup your 401(k) plan in 15 minutes
Over the past 2 years, several new internet-based “robo” 401(k) providers have launched in the small business retirement plan market. Led by tech entrepreneurs instead of industry veterans, these providers claim to slash the time it takes to establish a 401(k) plan using new technology. One claims they can setup a 401(k) plan in just 15 minutes!
The truth is, while technology might speed data collection and document delivery, it can’t reduce the amount of information 401(k) fiduciaries must supply a new 401(k) provider or guide 401(k) fiduciaries through a plan design process – the most time-consuming steps in the 401(k) plan establishment process.
Any provider (regardless of their technology) can deliver an off-the-shelf 401(k) plan quickly – they just need a 401(k) fiduciary willing to sign legal documents without reading them. Providers that claim otherwise are the most likely to put you in a plan that doesn’t meet your company’s needs or budget.
3. Index funds deliver only average returns
Investment in equity index funds – and other passively-managed investments designed to track a market benchmark – is exploding. Why? Studies show most outperform comparable actively-managed funds, which are intended to beat their benchmark, net of fees charged.
A fiduciary-friendly byproduct of index funds is they generally obligate a 401(k) provider to charge transparent fees - because index funds are less likely to pay hidden fees than actively-managed funds. That’s a problem for providers with high fees. To combat this issue, they disparage index funds by saying they only deliver “average” (i.e., benchmark) returns. This is not true because most actively-managed funds fail to outperform their benchmark over extended periods of time.
While there are some very good actively-managed funds available that routinely outperform comparable index funds, most don’t. Providers that don’t give you the straight story about index fund returns are the most likely to be hiding fees.
4. I will eliminate your fiduciary liability
Due to several high-profile 401(k) fee lawsuits, businesses that sponsor a 401(k) plan are more concerned than ever about their fiduciary liability. Some providers exploit this concern by selling complicated products – most notably, Multiple Employer Plans (MEPs) – that assume an employer’s fiduciary responsibilities related to plan administration. Many go as far to claim their fiduciary outsourcing products eliminate an employer’s fiduciary liability altogether.
This is a false claim. Regardless of what a provider might tell you, it’s not possible for an employer to fully outsource their fiduciary liability due to a 401(k) plan’s fiduciary hierarchy. When a 401(k) provider is hired, there is no way around an employer responsibility to monitor that provider for duty performance – regardless of whether the provider is a fiduciary themselves.
Fortunately, there is no reason for employers to fear 401(k) fiduciary liability. It’s easily avoided by following some simple best practices. Providers that tell you different are fearmongering.
A little skepticism can be a 401(k) fiduciary’s best friend!
After trying to communicate with his dead mother, Harry Houdini became a skeptic of the medium profession. I think 401(k) fiduciaries should be skeptical of 401(k) providers. There’s been a groundswell of 401(k) lawsuits over the past decade for a reason – 401(k) fiduciaries are getting duped into high-priced plans that aren’t in the interest of participants.
That’s not saying all 401(k) providers are bad. In fact, most are well-intentioned. However, there are some bad apples willing to lie about their services to boost sales. 401(k) fiduciaries should avoid these providers.
Eric Droblyen began his career as an ERISA compliance specialist with Charles Schwab in the mid-1990s. His keen grasp on 401k plan administration and compliance matters has made Eric a sought after speaker. He has delivered presentations at a number of events, including the American Society of Pension Professionals and Actuaries (ASPPA) Annual Conference. As President and CEO of Employee Fiduciary, Eric is responsible for all aspects of the company’s operations and service delivery.