The purpose of this paper is to review the often overlooked negative side of the 401(k) retirement plan. Several major drawbacks of the 401(k) such as insufficient investing, poor asset allocation and the detrimental effect of market volatility ever more apparent by current economic conditions are discussed. The still developing legal liability of 401(k) plans and those implications for Human Resource professionals is also presented through a legal case study.
More and more Americans rely more heavily on 401(k) retirement plans with the worsening Social Security situation, the decline of pension plans and the commonly held belief that 401(k)s are the superior choice for an adequate retirement. However this belief is rarely questioned, and even less so in prosperous economic times when the inherent high risk associated with many types of investments in 401(k) plans produce good results. Some financial advisors, economists and even lawmakers though have begun to scrutinize the nearly always positive image of 401(k)s for investing in retirement. It goes without much contention though that part of this new scrutiny is of course motivated by current worsening economic conditions.
Experts point to a myriad of misconceptions and inherent shortcomings in the current 401(k) system. These include unguided and often insufficient investing, hidden and sometimes substantially detrimental plan fees, poor asset allocations on investments, inherent and damaging stock market volatility and more. While most financial planners continue to hold that the 401(k) is an excellent way to invest in one’s retirement, some questions are being raised and there is perhaps a growing need for more explanation with that recommendation now.
First background information about the 401(k) retirement plan is presented including its basis in laws related to Human Resources and a brief demonstration of its rise in popularity. Next, the negative side of the 401(k) is presented through a literature review organized by several major bullet points. Lastly, a legal case study is presented to reinforce human resource related employer legal liability followed by the paper’s conclusion.
Table of Contents
I. Abstract
II. Introduction
III. Background Information
a. Basis in Law
b. Growing Popularity
IV. Literature Review
a. Replacing the Pension
b. Insufficient Investing
c. Hidden Fees and High Costs
d. Asset Allocation
e. Market Volatility
V. Legal Case Study
VI. Conclusion
Objectives and Topics
This paper examines the inherent limitations and potential negative outcomes associated with 401(k) retirement plans, particularly in the context of recent economic instability. It investigates whether these plans effectively fulfill their role as a primary vehicle for retirement savings in light of shifting responsibilities from employers to employees.
- The historical context and legal foundations of 401(k) plans under ERISA.
- Common systemic flaws including insufficient contribution levels and hidden administrative fees.
- The challenges of asset allocation and the risks of market volatility for individual participants.
- Legal implications for Human Resource professionals and employers regarding fiduciary duty.
Excerpt from the Book
c. Hidden Fees and High Costs
In April of 2007, Karen E. Klein wrote an article for BusinessWeek where she discusses the issue of high costs and hidden fees associated with many 401(k)s. She also includes a brief review of analysis of this topic by experts from CPA firms and Asset Management Groups. Klein writes that employers, when selecting a 401(k) plan for their employees sometimes just don’t scrutinize the costs associated with the plan and any management, consultation etc. fees that both they will incur and their employees. They also sometimes fail to look for redundancies (Klein, 2007).
Ken Weber, a registered investment adviser with Weber Asset Management notes the need to push for better regulation in the 401(k) industry and says, "Thousands of employers simply do not know that they and their employees are needlessly paying 1% to 2% more each year directly out of their retirement accounts. In some cases, the amount is close to 3% per year above what are true, necessary costs." These are fee that will negatively impact the investor’s ability to earn a sufficient sum of money which will make retirement affordable (Klein, 2007).
The risk of redundancy and high costs comes in when employers select annuity 401(k) plans, which offer additional benefits but at a considerably higher price compared to other plan forms. Annuity based 401(k) plans offer tax differed growth, when 401(k) investments are already tax deferred for employees. These plans also typically come with protection of principal options that mimic life insurance, which is again redundant when most employees carry their own life insurance already, some even through the employer. The end result Klein writes is that employees in the plan pay 2% to 4% for mortality and expense charges and along with various riders, all generally unnecessarily (Klein, 2007).
Summary of Chapters
I. Abstract: Provides an overview of the paper's focus on the shortcomings of 401(k) plans and the introduction of legal liability through a case study.
II. Introduction: Discusses the transition from traditional pensions to 401(k) plans and highlights the growing scrutiny regarding their efficacy for retirement.
III. Background Information: Explains the legal origins of 401(k) plans via ERISA and their rise in popularity among American workers.
IV. Literature Review: Analyzes specific criticisms of 401(k) systems including pension replacement, low savings rates, hidden fees, asset allocation difficulties, and market risks.
V. Legal Case Study: Examines the Supreme Court ruling in Larue v. DeWolff, Boberg & Associates, Inc. and its implications for fiduciary responsibility.
VI. Conclusion: Summarizes the findings and posits that 401(k) plans present significant, unaddressed risks for both participants and employers.
Keywords
401(k), Retirement Plan, ERISA, Pension, Fiduciary Duty, Asset Allocation, Market Volatility, Retirement Savings, Investment Fees, Human Resource Management, Employee Benefits, Financial Planning, Economic Downturn, Larue v. DeWolff
Frequently Asked Questions
What is the primary focus of this paper?
The paper explores the often-overlooked negative aspects of 401(k) retirement plans, assessing their viability as a secure tool for retirement.
What are the main thematic areas covered?
The work covers historical and legal foundations, systemic failures in contributions and fees, investment strategy challenges, and evolving employer legal liability.
What is the core research goal?
The objective is to critically evaluate whether the 401(k) system is sufficient for retirement given current economic conditions and the shift in accountability from companies to individuals.
Which methodology is employed?
The paper utilizes a literature review of expert analyses and a legal case study analysis to demonstrate current risks associated with the 401(k) system.
What does the main body address?
It details the history of ERISA, explains why current investment levels are often insufficient, documents the problem of hidden plan fees, and discusses the complexity of managing asset allocations.
Which keywords best describe this work?
Key terms include 401(k), Fiduciary Duty, ERISA, Retirement Planning, and Asset Allocation.
What was the outcome of the Larue v. DeWolff case mentioned?
The Supreme Court ruled in favor of the employee, determining that individuals can sue for fiduciary breaches that impair the value of their individual retirement account assets.
Why are hidden fees considered a major drawback?
Hidden fees reduce the actual growth of retirement savings, often by 1% to 3% annually, which can significantly hinder an individual's ability to reach a sufficient retirement sum.
- Citar trabajo
- Ed Malo (Autor), 2008, Negative Side of the 401k Retirement Plan. Background, Literature Review and Legal Case Study, Múnich, GRIN Verlag, https://www.grin.com/document/303372
