I was standing in front of 50+ people and giving a kick-ass 401k education meeting, the Advisor we were working with wasn’t comfortable with public speaking and I was happy to help out.  Things were going stellar!  People were engaged, asking questions and I was even entertaining them with the properly  inserted joke from time to time.   But then, the horrible happened…..some nerdy “know-it-all” from the back of the room raised his voice so all could hear and expressed his very negative views on the 401(k) plan.  In his opinion this was not a benefit, but a ridiculous scam! 

He started with a common complaint,  “Why does the S&P 500 Index fund have an expense ratio of 1.00%?”  further explaining that “I have a similar fund in my IRA that only costs one tenth of that!”  “This is a rip-off!”  “I don’t want to utilize the plan’s Financial Advisor and I sure as hell don’t want to pay him with your hidden fees!”

Well….that sure changed the mood of the room, but I am 401(k) Veteran and although these comments have turned the tide of my meeting, I am hoping to bring everyone back to the land of positivity (rainbows and unicorns) by handling this guy’s complaints with an intelligent response/explanation. Surely a retirement plan stud like myself can help this guy understand the legitimacy of this benefit.

I explain that unlike his IRA, this is an Employer Sponsored 401(k) Plan ruled under the laws/regulations of ERISA.  I clarify further that several things go into the running of a 401(k) Plan that do not happen in the simple world of IRAs.  For examples I mention:  fiduciary responsibility, investment reviews, core menu selection, source accounting, recordkeeping, loans, compliance testing, government filings, employee education, plan design, etc.

His next response was the knock-out blow that had me on my back like when Apollo Creed stepped into the ring with the Soviet boxer Drago…..  “If the plan is EMPLOYER SPONSORED, then doesn’t that mean the Employer should be paying for this stuff, instead of embedding all these costs into fees that are basically paid for by the Employees?” 

Let’s be honest, in a lot of ways….this guy is right.  Why wouldn’t the Employer just look at the 401(k) as another business expense?  Isn’t it better to shift these costs from the Employees to the Employer?

Many recordkeeping solutions these days allow for institutional share class of funds that are void of revenue share, these same RK programs are able to bill for their services as opposed to asset based fees.  If you combine this with a flat billable fee for your Advisor and your TPA does the same……the end result is a transparent, easy to understand fee structure that simultaneously lowers the cost to the employees while dramatically lowering the Fiduciary Liability to the Plan Sponsor.  It’s a WIN-WIN!   And by the way, it’s the right thing to do, which maybe is more important than everything else. 

Another bonus is you don’t have to worry about the guy in the back of the room anymore.  🙂

PLUG-PLUG-PLUG:  Retirement plan talk and beer drinking are the perfect match.  Watch the latest episode of The Retireholi(k)s at www.retireholiks.com