It's apparently 401(k) season over here at AHS, which is interesting considering:

1.  I don't personally have access to a 401(k) (Berkeley offers a 403(b) and a 457(b) instead, the latter of which I'm contributing to), and
2. I haven't written a comprehensive article on 401(k) plans.

But wait! That's not entirely true.  The AHS Wiki has a very large page on 401(k)s.  It's not super-organized or 100% comprehensive, but it will probably answer your questions.


As a general note, the AHS Wiki has a lot of information on topics that I haven't yet published articles on.  I use it as a low-pressure drafting space to make my research immediately accessible to other people.  Some pages are just a link collection, while others are in an advanced state of development.  Feel free to create an account and contribute!

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A Bad Plan Can Cost You A Lot

 Lately I've written about how states like CA and PA are divesting from overpriced, underperforming actively-managed mutual funds in their state pensions.  As I've repeated endlessly (and upon which John Bogle has written many books), index mutual funds are the best way to keep your fees down and get your fair share of financial market returns.

A 2014 study by Bloomberg classified some of the best and worst 401(k)s in the business, but they primarily focused on company matching, not cost.  Investment cost—the annual fee, or 'expense ratio', that you pay to hold a stock, plus any other management fees—is extremely important too: a high-priced 401(k) plan could cost you $100,000 over your lifetime.

What if your company only offers high-priced garbage?

Maybe your company isn't big enough to attract Jerry Schlichter's attention to start a lawsuit.  How can you talk to your boss about improving the retirement plan?

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Campaigning For Improvement

The Bogleheads, an online forum for investing enthusiasts, have prepared an article addressing this topic.  The punchline is that, under the Employee Retirement Income Security Act (ERISA), your company has a legal obligation (called "fiduciary duty") to make retirement account decisions that benefit employees.  This duty includes "paying only reasonable expenses of administering the plan and investing its assets" and "diversifying plan investments".  If your plan lacks low-cost index fund options, it fails both of these criteria!

So: carefully document this noncompliance, draft a friendly letter to your company's fiduciary (listed in your 401(k) Summary Plan Document), express your concerns for employee welfare and the potential for corporate liability under ERISA (Mr. Schlichter...), quote some Warren Buffett, and you have a shot!

Have you or anyone you know ever tried this?  Were they successful?  I'd love to hear about it!

An attorney, Jerome  'Jerry' J. Schlichter,  has begun suing companies that only offer high-cost investments in their 401(k) plans.


Wall Street Journal: Supreme Court Hears Case on 401(k) Plans

From the video:

"He did a lot of research into big company 401(k) plans and found... he had a lot of questions about, 'why are they picking these mutual funds versus these mutual funds? These mutual funds are higher cost than these... maybe there's a better way that we can do this.'  So he started more than a dozen lawsuits. ... The companies that he's reached settlements with have changed the mutual fund options in their plans, gone to lower-cost options, and agreed to disclose a lot more about what they're doing.

The broader implication is that fees are going to go down in plans. ... more index funds, more ETFs, that kind of thing."

He's arguing that only offering expensive investments is a breach of the plan manager's fiduciary duty as defined in the Employee Retirement Income Security Act (ERISA).  Go Jerry!

I've talked extensively about the importance of selecting low-cost investments.  The 401(k) is an important piece of the investing puzzle (after the IRA), but some 401(k)s lock you into lousy, expensive investments for the duration of your employment.  It's good to see that someone's doing something about this.