Greg Schmitz was meeting with a defined contribution plan record-keeper and third party administrator a few months ago, and during the meeting he came and got me because he wanted me to hear what they were proposing.  As a fiduciary to the plans that we work with, we assume the responsibility for selecting the investments and designing the portfolios that are used in the plan.  The vendor was trying to convince us that they had an automated system that would document investment selection and Greg was utterly shocked that their system looked at performance over only the past three years.  So was I.  When we questioned that methodology, they told us "well, over longer time periods, all you end up with are index funds."  Our point, exactly.  We chose to work with a different company.

There has been a lot of critcism of 401(k) plans over the past few years and, frankly, much of it is well-deserved.  The vast majority of plans, particularly those of small employers with less then $10 million in plan assets, are too expensive and offer terrible investment options.  The market for small plans is dominated by large insurance companies.  The fees are frequently hidden inside a group annuity structure.  But, change is coming.  New Department of Labor rules regarding fiduciary duty and fee disclosure are on the horizon - and it will expose the insurance company plans for what they are.  It will also require plan sponsors who have chosen to use them to explain the excessive fees to the participants.

The New York Times ran an article last weekend on this subject (thanks again, to one of our great NY resident clients for forwarding it) and concluded that there are some very good low-cost options, including working with a Registered Investment Advisor that can select inexpensive funds from Dimensional Fund Advisors for the plan. We've been acting as the investment advisor to 401(k) plans for many years using low-cost funds from Dimensional and Vanguard with full disclosure of all fees.  The plans that we work with won't have a thing to worry about under the new DOL rules.  That won't be the case for the plans that fell for the sales pitch from the big insurance companies.