Page 6 - The Great 401k Rip-Off

institutional investors did most of the trading, which were made at the speed of a chit being passed
in the pit. But, with the advent of the 401(k) and other qualified retirement plans, 80 million new
small investors, who really had nowhere to turn except for the Wall Street representatives
themselves, began investing in the stock market.

Computer trading proliferated, the OTC market became a major force, thousands of mutual funds
popped up like mushrooms, and trillions of dollars poured in from 80 million new investors. As a
result, markets became very unbalanced and asymmetric (Wall Street has the real knowledge and
leverage), opening up the way for much of the abuse that ultimately led to the loss of trillions of
dollars—twice in one decade [11].

When the 401(k) took off, so too did the mutual fund industry. As Wall Street and employers started
encouraging employees to “take charge of their future” and put the money in the stock market, what
had been a few hundred open‐ended mutual funds at the end of the 70s quickly became thousands
as Wall Street became aware of how suited they were for the long term, buy and hold investors
created by the defined contribution retirement movement. By 1996, over $3.5 trillion in assets had
been deposited in mutual funds. They had swelled to $16.3 trillion by 2016, largely because of all of
that 401(k) money flowing into the markets. [12]

Mutual funds are often slow and clunky in today’s fast‐moving market environment. They are often
opaque and full of hidden fees. In the April 23, 2013 PBS show, Frontline, broadcast “The Retirement
Gamble.” Jack Bogle, founder of Vanguard, had the following to say about fees:

…the financial system put up zero percent of the capital and took zero percent of
the risk and got almost 80 percent of the return. And you...the investor…put up
100 percent of the capital, took 100 percent of the risk, and got only a little bit
over 20 percent of the return. [4]

To make matters worse, the qualified retirement plan industry created a generation of captive
investors. A truth about The IRA alone provides 10% penalties plus taxes if you access your money
prior to 59 ½. However, IRAs are infinitely better than employer‐sponsored DC plans as you remain in
control and have the entire financial universe in which to invest.

Some of their drawback are:

 They are often structured as a “set it and forget it” program, and people are urged not to look
at their investment statements that often.

 401(k) plans are more restrictive. 401(k)s and many IRAs is they severely limit your access to
your money, often until you separate from service.

 They add layers of fees not present in IRAs in the form of revenue sharing (kickbacks to the
broker and employers for picking certain funds), plan design, custodial fees, administration,
and compliance, usually charged by a third‐party administrator (TPA), and limited options in
which you can invest. In other words, you pay more for less access and fewer choices.

For Wall Street this was an epic windfall. As of 2012, according to the U.S. Federal Reserve, there was
an estimated $24 trillion in U.S. retirement plan assets, approximately $13 trillion of which were in
defined contribution IRAs and employer‐sponsored plans such as 401(k)s and 403(b)s. [13]

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