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The No. 1 Reason for 401k Frustration

Unsurprisingly, Congress has provided quite nicely for themselves and other federal employees

401k, Congress, retirement, feesCongress confounds yet again.

Here’s a shocker (or not): When you pour unbelievably huge sums of lobbyist money into Congress, you can buy a near-reversal of just about anything.

A reversal, or delay, of the fiduciary rule, that at its core had a minimum standard of conduct for brokers, insurance agents and registered investment advisors “to act solely in the best interest of the plan participants and their beneficiaries,” defies logic.

It’s especially maddening when Congress and certain regulators weaken protections for the average participant while enjoying favorable treatment for themselves.

There are over $7 trillion dollars in defined contribution assets, so we’re talking about a vital workplace benefit. Nearly 56 million American workers in over 550,000 plans were active participants as of 2015.[1]

President Trump and Congress have done whatever they can to supposedly keep the retirement plan space “safe,” but only safe for those who sell tax-enhanced annuities within a qualified plan (stupid beyond belief); those who sell proprietary investment options that are often unnecessarily expensive and inefficient; and plan sponsors who either willingly or unknowingly fail to proactively provide prudent oversight for their plan.

To be clear, plan sponsors cannot delegate away their responsibility (or their personal liability) for prudent plan oversight, including and especially to a broker or insurance agent.

Unsurprisingly, Congress has provided quite nicely for themselves and federal employees. They have a completely different retirement plan than private sector workers, one that is generously funded, low-cost, and operated solely in their best interest.

It’s not an opinion; it’s a fact.

The Thrift Savings Plan is the retirement vehicle for some 4.7 million current and former federal employees. According to the TSP’s website, government participants pay the following expense ratios:

For 2016, the average net expense was $0.38 per $1,000 invested, which equates to 3.8 basis points or $38.00 a year on a $100,000 account balance.

How does it compare to what private sector DC participants pay?

I’ve examined nearly 1,000 defined contribution plans over the course of my career, and this is the lowest cost investment expense ratio I’ve ever seen (if readers have seen lower, please let me know).

Congress obviously believes low costs are important for participant success, so why not with private sector workers?

The following numbers illustrate the impact fees have on the value of a hypothetical 401k. They show what happens over 25 years to a one-time $10,000 investment that earns 10 percent before fees under three different fee scenarios.[2]

Expense Ratio Scenario:

$10,000, invested for 25 Years, average annual growth rate of 10 percent

0.00 percent    $108,347

0.31 percent    $100,966

1.88 percent    $70,413

The average 401k plan has an estimated expense ratio greater than 1 percent.[3] For every $1 a private sector worker is charged, their public-sector counterpart pays $0.38. Hard to believe, but true, and the reason for 401k frustration.

As we know, that frustration, unfortunately, exists on many levels. I’ll detail more in coming weeks.

Dan McConlogue, AIF, PPC, is director of corporate retirement plans with Ritholtz Wealth Management.


[1] “Retirement Assets Total $26.1 Trillion in First Quarter 2017.” ICI.org. June 22, 2017.

[2] “If Your 401(k) Plan Is Doing This, You’re in Trouble.” fool.com. March 28, 2105

[3] “401k Averages Book.” 401ksource.com. 2016

2 Comments on "The No. 1 Reason for 401k Frustration"

  1. I share your frustration, but it’s hard to compare a private sector plan (or even a large government plan, say for a state) with the federal Thrift plan–4.7 million accounts, whew, that allows serious economies of scale.

    IMO the government should approve several basic 401(k) templates and allow any provider offer them, as with Medigap policies, and have them considered safe harbor plans. Currently, most small employers are having to reinvent the wheel
    with every plan. Hiring all the experts and advisors, lawyers etc adds expense on top of the lack of economies of scale. That, or allow any worker to join the Thrift plan!

  2. Institutional Consultant | August 18, 2017 at 7:25 am | Reply

    The Thrift Savings Plan comparison is one of the most used and inaccurate comparisons to the 401k industry that exists.

    The Thirft Savings Plan legally can do something no other 401k plan can do, which is it can and does use un-vested government employer match amounts to pay down both expense costs and recordkeeping costs. THIS IS FACT. With the unlimited budget of the US Government there is no problem with this construct. Yes, private companies can also pay billable fees directly for recordkeeping and in CIT’s some expense.

    Using the Thrift Savings Plan structure combined with the unlimited resources of the US Government to compare against 401k plans in the private sector is truly like comparing apples and oranges.

    Perhaps a better law would read companies have to pay for recordkeeping expenses directly and employees pay nothing. That at least would be a logically argument. Please research Thrift Savings Plans better and you will find how flawed your comparison looks to those with knowledge and understanding in this space.

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