Most retail 401(k) and 403(b) plans are run by generalists who turn over frequently and have little to no industry experience and training. As a result, they often believe what their record keeper and adviser tell them. And more dangerous than outright lies are the half-truths that become myths accepted by plan sponsors, because they do not know better.
Here are the six most dangerous myths still rampant in the retail defined-contribution industry that need to be dispelled:
1. “You can outsource all of your fiduciary responsibilities.” Most plan sponsors are eager to limit liability, and it is in fact a prudent practice to hire qualified professionals to help them fulfill their fiduciary responsibilities. But even if they hire a 3(38) investment fiduciary that has discretion to select and monitor investments, for example, plan sponsors have the duty to make sure that the third party is qualified and is actually performing its job. Will pooled employer plans perpetuate this myth?
2. “Fees matter most.” This myth has two horns, like many Greek gods. While fees are important, there are other factors that have a greater impact on improving retirement income, like deferral rates. Secondly, a cheap plan with low-cost index funds is not an absolute protection against liability. The Department of Labor only requires fees to be reasonable.
3. “All retirement plan advisers are created equal.” The advent of DC aggregators has highlighted the dichotomy between experienced retirement plan advisers with dedicated resources and the wealth managers who just dabble and are affiliated with organizations that provide limited support. That nuance is lost on most plan sponsors, who are just beginning to understand the different roles of the record keeper, adviser, third-party administrator and money manager.
4. “The only difference between active and index funds is cost.” Many active money managers welcomed the expected market downturn during the pandemic as an opportunity to show how they help clients even out the dips. While the market was volatile, it went up, in large part due to the FAANG stocks. Though there has been a lemming move to index funds by DC plans, very few RPAs use them exclusively for good reason, especially in selective asset classes. Meanwhile, larger, well-run active managers charge low fees and have better long-term results.
5. “My plan is free if I don’t have to write a check.” It’s easier and more common to have participants pay all the administrative costs of DC plans than it is with health care coverage. Though this myth that has mostly been dispelled, the hangover effect lingers. Why pay attention to the plan beyond fulfilling fiduciary duties if there is no apparent hit to the bottom line?
6. “I do not have to make a request for proposals and have an independent benchmarking of my plan adviser.” Most experienced RPAs want DC plan sponsors to conduct an independent RFP – unless it is their client or a current prospect. Though many RPAs built their practice on record-keeper and investment searches and fee benchmarking, they resist applying the same logic to themselves. That is understandable but certainly not commendable.
We can bust these myths through facts, trust and real talk, which is critical if we hope to improve retirement security.
[More: Who is your 401(k) client?]