401(k) Retirement Funds Are a Rip-Off

For indispensable reporting on the coronavirus crisis, the election, and more, subscribe to the Mother Jones Daily newsletter.


Matt Yglesias has a dyspeptic take on how the 401(k) retirement industry works:

  • Poor people get absolutely nothing.
  • Wealthy people who would have had large savings anyway get a nice tax cut that offers no meaningful incentive effect.
  • For people in the middle, the quantity of subsidy you receive is linked to the marginal tax rate you pay—in other words it’s inverse to need.
  • A small minority of middle class people manage to file the paperwork to save an adequate amount and then select a prudent low-fee broadly diversified fund as their savings vehicle.
  • Most middle class savers end up either undersaving, overtrading, investing in excessively high-fee vehicles or some combination of the three.
  • A small number of highly compensated folks now have lucrative careers offering bad investment products to a middle class mass market based on their ability to swindle people.

Dyspeptic but basically accurate! The first four bullets are, unfortunately, just business as usual in America. It’s the last two that really rub salt in the wounds. But it’s simply a fact that a great number of 401(k) funds are extremely poorly suited as retirement vehicles and suck up far more in fees than can possibly be justified.

But the news is even worse than that! Last year the Labor Department issued new rules that forced funds to disclose their fees in an easily understood manner. The idea was that if they’re going to rip you off, at least now you’ll know how much they’re ripping you off and maybe switch to a more honest fund. But it didn’t do much good:

After the new fee disclosure statements went out, roughly the same percentage—half!—of participants said that they still do not know how much they pay in plan annual fees and expenses, according to a recent survey by LIMRA, an association of insurance and financial services organizations.

….For those 401(k) participants who said they thought they knew how much they paid in fees, most of them were way off base. One out of four participants thought they paid 25% or more in fees, 16% thought they paid between 10% to 24% in fees, and 30% thought they paid between 2% and 9% in fees. Only 28% of participants thought their fees were less than 2%.

That group is the closest to reality. On average fees and expenses range between 1 to 2 percent, depending on the size of the plan (how many employees are covered) and the employees’ allocation choices (index funds versus actively managed funds), says LIMRA.

Basically, this suggests that people have no idea what “fees” even means, which bodes ill for the power of disclosure to have any effect. If you think that 2 percent is really low, then you’re getting ripped off even though you do know the fee structure of your fund.

The era of the defined-benefit corporate pension is gone, and it’s not coming back. People switch jobs too frequently for it to work anyway. The only real options are either private plans like 401(k)s, which ought to be reformed to make them better, more honest retirement vehicles, or higher Social Security payments. Most likely, both. The former would help the middle class and the latter would help the poor and the working class. The upper middle class and the wealthy can fend for themselves. They’re doing pretty well already.

SIX TRUTHS

Reclaiming power from those who abuse it often starts with telling the truth. And in "This Is How Authoritarians Get Defeated," MoJo's Monika Bauerlein unpacks six truths to remember during the homestretch of an election where democracy, truth, and decency are on the line.

Truth #1: The chaos is the point.

Truth #2: Team Reality is bigger than it seems.

Truth #3: Facebook owns this.

Truth #4: When we go to work, we're in the fight.

Truth #5: It's about minority rule.

Truth #6: The only thing that can save us is…us.

Please take a moment to see how all these truths add up, because what happens in the weeks and months ahead will reverberate for at least a generation and we better be prepared.

And if you think journalism like Mother Jones'—that calls it like it is, that will never acquiesce to power, that looks where others don't—can help guide us through this historic, high-stakes moment, and you're able to right now, please help us reach our $350,000 goal by October 31 with a donation today. It's all hands on deck for democracy.

payment methods

SIX TRUTHS

Reclaiming power from those who abuse it often starts with telling the truth. And in "This Is How Authoritarians Get Defeated," MoJo's Monika Bauerlein unpacks six truths to remember during the homestretch of an election where democracy, truth, and decency are on the line.

Truth #1: The chaos is the point.

Truth #2: Team Reality is bigger than it seems.

Truth #3: Facebook owns this.

Truth #4: When we go to work, we're in the fight.

Truth #5: It's about minority rule.

Truth #6: The only thing that can save us is…us.

Please take a moment to see how all these truths add up, because what happens in the weeks and months ahead will reverberate for at least a generation and we better be prepared.

And if you think journalism like Mother Jones'—that calls it like it is, that will never acquiesce to power, that looks where others don't—can help guide us through this historic, high-stakes moment, and you're able to right now, please help us reach our $350,000 goal by October 31 with a donation today. It's all hands on deck for democracy.

payment methods

We Recommend

Latest

Sign up for our free newsletter

Subscribe to the Mother Jones Daily to have our top stories delivered directly to your inbox.

Get our award-winning magazine

Save big on a full year of investigations, ideas, and insights.

Subscribe

Support our journalism

Help Mother Jones' reporters dig deep with a tax-deductible donation.

Donate