401k and 403b Plans: Is A Fox Guarding Your Henhouse?
In 2007, I wrote to Congress to ask them not to pass a law that they were working on that would have required a participant in a 401(k) or 403(b) plan to hire an expert to advise him or her.
Just think about it. It makes no sense to hire a fox (vendor) to guard the henhouse (401k or 403b plan), right?
And it would be a mistake to allow your plan’s co-fiduciary to sell investments and other services such as recordkeeping and administration to your plan. Why? He or she has inherent conflicts of interest!
Would you advise a farmer (employer) to hire a fox (vendor) to keep your chickens (employees) safe? No!
Vendors have inherent conflicts of interest and they will always act in their own best interests, not the participants’. For instance, do you believe that your plan’s vendor will fire his or her company for not making your plan truly low cost? You don’t really believe that your plan’s vendors will refer you to a competitor who provides a better service for a lower cost, do you? If you do, it would be a mistake.
My point is this. You may need to hire one or more vendors to assist you with your 401k or 403b plan, but you’ll need to give your plan’s vendors instructions on what you want them to do for your plan so that it will be truly low cost. Truly low cost means that your plan has recordkeeping and administration that costs not more than the current benchmark, which is $25.00, per eligible employee, per year with no hidden or camouflaged costs. And it also means that your plan has a diversified, core, mix of low cost investments that match the market’s performance less the cost of the funds. Index funds are designed to match the market’s performance less their cost.
By the way, for employee who still think they can beat index funds in performance, you can set up low cost self-directed accounts for them. You can’t stop people from shooting themselves in the foot by experimenting (trying to beat index funds in performance), but you will still owe them the right kind of education–not the kind of education that encourages them to be foolish with their retirement money.
Note: Most vendors can give you accurate information on the laws, rules, and regulations that you, the plan sponsor (employer) are responsible for knowing, but it would be a mistake to trust vendors to set up a truly low cost plan for your company.
Best wishes,
Your teacher, Frank Cirullo