Retirement: The flaws of the 401(k)

Chances are you don’t even know how greedily fees are eating into your 401(k) plan, said Matthew Yglesias in Slate.com. The fixed costs associated with administering a 401(k) plan may not be much of a problem if they’re shared across a big base of thousands of employees at a Fortune 500 company. But “if you work for a midsized firm, those costs weigh heavily on each individual plan recipient.” These fees average close to 1 percent for plans with less than $50 million in assets, and can be considerably higher than that for smaller ones. That just highlights “the underlying paradoxical and crappy nature of the 401(k) approach.” The retirement fund that eats into your savings the least is “a really gigantic one that limits your choices” to low-fee diversified index funds that do better over time than fancier options. Yet if “large scale and limited choice are the outcomes you want,” then you end up with something that looks an awful lot like Social Security.

A bad 401(k) plan can definitely “make it harder for people to retire than it should be,” said Sheyna Steiner in Bankrate.com. Most people have no idea what fees they’re paying, and the fees aren’t always obvious. To get a hint, at least, check out your funds’ share classes. Many retirement plans invest in so-called R shares, but they’re not all created equal. Look for “higher numbers attached to the R, for example R4 shares rather than R1.” The lower the number, the higher the fees. “If it’s an R1, R2, or R3, you can bet there is a lot of hidden expense built into that fund,” says Donald Jones of Fiduciary Doctors in Phoenix. The difference of 1 percent in fees between share classes can add up over a lifetime to $200,000 less in savings at retirement.

Maybe it’s time for the government to just stop subsidizing this flawed form of retirement saving altogether, said Walter Hamilton in the Los Angeles Times. A new report by the Economic Policy Institute drives home the now broadly recognized point that for most Americans, “the 401(k) system has been a dud.” Barely half of middle-income earners even have 401(k) plans to begin with, and their median balance in 2010 was just $23,000. “Not surprisingly, 401(k) savings are clustered among the ranks of the affluent, with 72 percent of total savings held by the top 20 percent income group.” Just a few years ago, financial experts were talking about how to encourage people to save more in their 401(k)s; now we’re hearing more and more of them calling for the system “to be scrapped entirely in favor of something else.”

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