Jonathan Fredman, AIF®, CRPS®, CPFA
Retirement Plan Consultant
There are five common misperceptions about 401(k) plans that may lead you to question how effective these retirement savings options really are:
- High fees: 401(k) plans often have high administrative and investment fees that can eat into your retirement savings over time.
- Limited investment options: Participants often face a narrow selection of investment choices.
- Inadequate contribution rates: Many employees don’t contribute enough to their 401(k) plans.
- Fond memories of pensions: Pensions are often viewed through rose-colored glasses as the retirement option most Americans relied on.
- Employees lack financial literacy: Many employees don’t have the financial knowledge needed to make informed decisions about their 401(k) investments, which can lead to poor choices.
While there is some truth to these misperceptions, it doesn’t mean 401(k)s are “broken” beyond repair—not at all.
Clearing up the misconceptions
High fees?
Fees in 401(k) plans have dropped significantly over the years. According to Morningstar, the average asset-weighted 401(k) fee fell from 0.87% in 2004 to 0.36% in 2023, saving investors billions. Today, fees for popular index mutual funds and ETFs are often below 0.05%.
Limited investment options?
The options are limited to help you avoid being overwhelmed by too many choices, which can lead to “menu freeze” or picking the wrong option for the wrong reasons. Additionally, because employers have a fiduciary responsibility, limiting options helps reduce the risk of offering untested investments, like cryptocurrency or individual stocks, which could lead to costly lawsuits.
401(k) plans have also improved by offering more “do it for me” and “help me do it” investment solutions. According to a recent Vanguard study, nearly all participants had access to target-date funds (TDFs), and almost 80% had access to managed account services as of year-end 2024. Roughly two out of every three dollars contributed were invested in TDFs.
Inadequate contribution levels?
Employers can support employees by stretching the match and offering automatic enrollment with match increases. Here’s how deferral rates have improved:
- In the 24th edition of Vanguard’s annual analysis of retirement saving behavior, 45% of participants increased their deferral rate in 2024—either on their own or through an automatic annual increase. This is the highest percentage Vanguard has tracked.
- 61% of plans with automatic enrollment defaulted employees into the plan at a rate of 4% or higher—a trend that has grown each year.
- Nearly 7 out of 10 plans with automatic enrollment included an annual escalation feature that raised their deferral percentage.
Whatever happened to pensions?
Pensions were once the standard for employee retirement programs, but the financial burden became too heavy for most companies. Many employees still long for the ease and security that pensions promised. However, pensions often didn’t provide enough coverage for retirement and didn’t apply to the entire workforce.
Pension participation peaked at about 39% of private sector workers in the 1970s, according to Andrew Biggs, a senior fellow at the American Enterprise Institute. Yet, due to strict vesting rules, nine out of ten workers never received their pension benefits.
Employees lack financial literacy?
This is an area where more work is needed. A PwC study found that 53% of employees are stressed about their finances and often lack the knowledge to make smart, responsible financial decisions. This underscores the importance of employers providing clear information on all aspects of finances, including retirement, student loans, managing debt, budgeting, and more.
Financial literacy benefits both employees and employers. It can help reduce stress, which lowers absenteeism and improves productivity. It also helps attract and retain talent while reducing healthcare expenses.¹
What are the responsibilities of a plan sponsor and what can an employer do to assure a successful 401(k) plan?
Strong plan governance
This involves reviewing the investment policy statement (IPS) and committee documentation, training fiduciaries, assessing cybersecurity practices, conducting annual searches for terminated participants with incorrect addresses, performing fee benchmarking, issuing periodic RFPs, and reviewing the pricing impact of proprietary versus non-proprietary funds.
Why is all of this necessary? A well-governed plan is more likely to stay compliant with Department of Labor (DOL) and Internal Revenue Service (IRS) regulations, helping you avoid legal issues. Additionally, well-governed plans are often better designed for employees, providing quality investment options.
Financial wellness
In a 2023 PwC survey, financially stressed employees are twice as likely to be looking for a new job (36%) compared to just 18% of those who are not financially stressed. Additionally, 73% of financially stressed employees say they would be attracted to an employer that cares more about their financial well-being, compared to only 54% of non-financially stressed employees.
The same survey found that one in four employees identified access to unbiased counselors as the financial wellness benefit they would most like to see added.
Employers who invest in a strong financial well-being program see an average return of three dollars for every dollar spent on the program.
What Marsh McLennan Agency can do to help
We help organizations create and implement strong plan governance and fiduciary best practices while identifying issues and opportunities in their retirement programs. We can also assist with DOL audits. Our Prosper Wise program provides a straightforward and proactive way to help employees improve their financial literacy.
To learn more, contact us.
¹ AB Research, “Inside the Minds of Plan Sponsors”, March 2018.
