Why are typical 401(k) plan fund choices so awful?
I don't expect a huge number of funds to choose from in a 401k plan, but all the plans I've ever seen are loaded with funds that have outrageously high management expense ratios (MERs) and they underperform. (This is not just for one company – it's been true at every place I've worked, I've seen people complain about 401k lousy choices on this site, and have heard people complain about this phenomenon in other contexts.)
Often the best you can hope for is an S&P 500 index fund with a low MER, and sometimes even that isn't available.
You could easily replace the actively managed bond fund with a low-cost index fund, same for the small caps.
What is it that creates this situation?
Does anyone have a success story related to getting 401k options changed for the better?
(I'm wondering if it's worth lobbying for change, or if I should just put everything into the S&P500 fund and allocate into other asset classes outside this account.)
(4)4 Comments
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401k choices are awful because:
The 401k lobby is powerful.
The customer is a captive audience.
Most participants do not know they are awful, thanks to expense ratios.
The best remedy I have found is to roll over to an IRA when changing jobs.
The managers of the 401(k) have to make their money somewhere. Either they'll make it from the employer, or from the employees via the expense ratio. If it's the employer setting up the plan, I can bet whose interest he'll be looking after.
Regarding your last comment, I'd recommend looking outside your 401(k) for investing. If you get free money from your employer for contributing to your 401(k), that's a plus, but I wouldn't -- actually, I don't -- contribute anything beyond the match. I pay my taxes and I'm done with it.
To piggy back mbhunter's answer, the broker is going to find a way to make the amount of money they want, and either the employee or the company will foot that bill.
But additionally, most small businesses want to compete and the market and offer benefits in the US. So they shop around, and maybe the boss doesn't have the best knowledge about effective investing, so they end up taking the offering from the broker who sells it the best.
Give you company credit for offering something, but know they are as affected by a good salesperson as anybody else. Being a good sales person doesn't mean you are selling a good product.
I would point this out to the committee or other entity in charge of handling this at work. They do have a fiduciary responsibility for the participant's money and should take anything reasonable seriously.
The flip side to this is 95% of participants -- especially participants under 35 or so -- really pay next to no attention to this stuff. We consider it a victory to get people to pony up the matching contributions. Active participation in investment would blow our minds.
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