Page 7 - The Great 401k Rip-Off
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Now, add to that the 3%‐5% total fees typically paid by 401(k) account holders. That’s anywhere
from $260 ‐ $650 billion a year in fees charged by plan administrators, brokers who sell them, and
mutual fund companies who provide the products that fund them. [4]
Even at the low end of 3% puts that number at just under $400 billion. Think about that. $400 billion,
year after year going into the pockets and coffers of Wall Street. For decades. Whether we, the
investors, make money or not. How many trillions of dollars have we transferred to the people who
store and gamble with our money over the past four decades? Is it any wonder the financial
community is so plugged into these things? Is there any incentive at all for them to uncover the truth
and seek alternatives in our behalf? Personally, I believe it’s obvious what’s going on. [14]
Who is watching out for you and me? Our employers? Most employers are concerned about only one
thing when it comes to setting up these plans, and that is avoiding liability. The government has
aided with these concerns by establishing the “Safe Harbor” defined contribution (DC) plan that
protects employers from certain reporting requirements and liability if they provide a certain mix of
funds and risk classes, and specified company matches. [15]
The fact we are trapped in these accounts for decades, unable to access IRAs prior to age 59 ½, and
quite often unable to access our employer‐sponsored plans prior to separation from service supports
the widespread proliferation of hidden and exorbitant fees piled on by virtually everyone in the
supply chain. This includes employers, who frequently receive kickbacks for including certain funds,
to brokers who sell them, to the mutual fund companies and plan custodians who charge what are
basically storage fees. [4] [14]
Not only are we held hostage to these plans, we have no real say over how our money is invested.
Employers and brokers pick the mix of funds, primarily designed to reduce liability and maximize
broker fees and employer kickbacks. To reduce costs, plans often impose trading restrictions, limiting
the ability to move in and out or from one fund to the other. [4]
Everyone has a stake in this. Employers are all in because adopting the defined contribution (DC)
model took them off the hook for billions in pension liability. In addition, they, brokers and planners
are all in because they can charge fees for placing, and then “managing” retirement assets. Mutual
fund companies are all in because that’s where most of the money is stored. And all of these are
shamelessly skimming off the top. [4]
How does this impact you, the investor?
Beyond considering the hidden fees, limited choices, and restricted trading options present in these
plans, retirees should take a good look at the additional market and tax risks, both of which can limit
their effectiveness.
Having a large portion of your income taxed during retirement can cause what is known as your
provisional income to rise, thereby driving up taxes on your Social Security benefits. Provisional
income is calculated as one‐half your Social Security income plus all your other income, including
wages, investments, pensions and taxable or tax‐exempt interest.
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