Thursday, August 11, 2016

The Case of the Bloated Retirement Plans

Once upon a a time, 401(k) plans and their ilk seemed relatively simple, with a mere handful of investment options. Sometimes employers even helped to pay plan expenses.

Gradually but inexorably, investment choices proliferated and plan expenses expanded, cutting deeper into participants' returns.

Now the times are a-changin'. Young investors have learned that the surest way to increase returns is to lower costs. Bewildering arrays of investment choices now draw complaints, not kudos. Latest sign of the times: a federal lawsuit aimed at employee retirement plans sponsored by Yale, N.Y.U. and M.I.T.

Like previous litigation aimed at corporate plans, also steered by attorney Jerome J. Schlichter, the new suits allege that the schools' plans incur needlessly high administrative expenses and offer investment choices that are mindlessly numerous and sometimes inferior to lower-cost options. (Do N.Y.U,'s employees really want to put their nest eggs into variable annuities?) M.I.T. also draws criticism for choosing New England's investment titan, Fidelity, as plan provider. (Fidelity's CEO has served on M.I.T.'s board of trustees.)

Participants in 401(k) plans and their non-profit equivalent, 403(b) plans, need all the cost-cutting help they can get. Still, older alumni may feel a tinge of sympathy for institutions that find themselves behind the times.

Related post: In deluge of Funds, Investors Sink or Swim


Jim Gust said...

I am skeptical about this lawsuit. To me, it suggests that no good deed goes unpunished.

How much does MIT match the employee deferrals? I have no idea. But if they provide any match at all, I'm sure that it swamps the "bloated" expenses. The expenses always seem to be compared to a theoretical "best case" to create the argument that the employees are being shortchanged. Hey, the employees had the choice to avoid those expenses altogether by not contributing at all, right?

How much does the lawyer stand to make if he succeeds? No doubt a large multiple of what most the MIT employees have in their accounts.

This doesn't really pass my smell test.

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