How Fidelity Could Reform the 401(k) Plan System, but Won't

Fidelity says withdrawals from 401(k) plans are on the riseAccording to Fidelity Investments, withdrawals from 401(k) plans are on the rise. This is a troublesome sign. The average 401(k) plan balance at the end of the second quarter of this year was a paltry $61,800 -- hardly enough to "retire with dignity."

Plan participants reduced their balances by taking loans or obtaining hardship withdrawals. A staggering 22% of participants have loans outstanding, and 62,000 participants took hardship withdrawals. This doesn't bode well.

Need to Access Cash

You can easily understand the need to access the cash in these accounts. More than 250,000 homes were foreclosed in the second quarter of 2010. Expenses for tuition and the purchase of a primary residence were also cited as reasons for these withdrawals.

Hardship withdrawal rules vary with the terms of individual plans. Typically, payment of medical expenses and primary residence purchases qualify. These withdrawals don't have to be repaid, which is good short-term news, but often shifts the problem from the present to the future, when participants may find it difficult to ever retire.

Loans from 401(k) plans can be very problematic. Obviously, you are diminishing the amount in your account. Less money means less return. If you leave your job, you will have to pay back the full amount of the loan. If you cannot repay the loan as required by IRS guidelines, the loan will be treated as taxable income and a 10% penalty will be assessed. Additional restrictions may be applicable depending on the terms of your plan.

What Fidelity Could Do

As the "nation's No. 1 provider of workplace retirement savings plans," there's a lot Fidelity could do to improve this system. If it wanted to be not only the "No. 1 provider," but also the best provider, it could assume full 3(38) ERISA status and agree to act as a fiduciary to plan participants. This would turn the industry on its head.

Instead of populating its plans primarily with expensive, actively managed funds (where the fund manager attempts to beat a designated benchmark), it could limit investment options to its low-cost, stock and bond index funds. It could offer a limited number of pre-allocated portfolios consisting solely of index funds at varying risk levels. Instead of having actively managed funds in its target date funds, it could learn from its competitor Vanguard. Vanguard's target date funds consist solely of its low-cost index funds.

It could refuse to take "revenue sharing" payments from other fund families as the price of admission to the array of investments offered to plan participants. It could disclose all fees and costs in an open and transparent way.

Fees Impossible to Calculate, Difficult to Justify

It's one thing for Fidelity to lament the sorry state of low balances in 401(k) plans and tacitly blame beleaguered employees. Where's the examination of its own conduct? Fidelity participates (as do other fund families) in a system that practically insures the returns will be significantly less than market returns. It reaps huge fees, which are almost impossible to calculate and are difficult to justify.

Raising the consciousness of plan participants that withdrawing funds from their plan accounts may jeopardize their future retirement is useful. Taking a leadership role in reforming a system that primarily benefits mutual fund families and plan advisers would be far more newsworthy.

Don't count on it.

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Dan, What do you charge your clients to invest them in index funds? Do you take responsibility for the asset allocation? Are you tactical or strategic? I'm curious as you flog others business models but do not disclose much about your own?

August 24 2010 at 9:06 AM Report abuse rate up rate down Reply

The only story I found truly interesting was How Finance Reform Will Really Work, and AOL isn't allowing comments on that story. So, I'm just saying hello, and good-bye. For sure, whatever the dems ram through will need immense tweaking by reps.

August 24 2010 at 1:07 AM Report abuse rate up rate down Reply

If you play your cards right, you can afford a twenty year old. But no baby face or baby hands.

August 24 2010 at 12:45 AM Report abuse rate up rate down Reply

With Oba-Mao in the White House, NOTHING will save our 401k plans.

August 23 2010 at 10:53 PM Report abuse +1 rate up rate down Reply

I can see the ppl laid off taking their money out. I probably would also. But alot of us are still working and paying taxes, Contributing to our 401k. And then along comes obummer and his mary band of thieves. "We're going to confiscate your 401k and mail you a bad check for half of what you are entitled to", its only fair. its just like the mortgage debicle, should I pay my mortgage or not? If I dont I'll get a free ride like everyone else. this administation is sending the wrong message.

August 23 2010 at 9:38 PM Report abuse rate up rate down Reply

Fidelity cost me alot of Money and I will never do any business with them again. I worked for a company that had Fidelity and our 401k manager and we were sold to another company. When we met with the reps from Fidelity they said we could keep our company stock in our 401ks but could not purchase any more we must purchase the stock in our new company instead and I had no problem with that i invested my money in other investments but after a year they made us sell our stock in our old company and a very low price that no one wanted to do this but the liquidated t

August 23 2010 at 9:06 PM Report abuse -2 rate up rate down Reply
1 reply to exercomminc's comment

they liquidated it and it tripled in 6 months and I had 2,000 shares and lost a ton of money because of them. I bought what I wanted to buy and and did not want my money used to purchase their funds and i would of not put my money in a 401k if I did not like the investments I would put it in a IRA instaed and make my own decisions.

August 23 2010 at 9:11 PM Report abuse -1 rate up rate down Reply

The data is precisely the opposite. Only 1 in 3 actively managed funds equal or beat their benchmark in any one year. Outperformance doesn't persist. Over a ten year period, the statistics are dismal: only about 5 in 100 will equal or beat their benchmark. You can see support for my data here: The majority of this data consists of pre 2008/09 returns, which can help the case for active management. The creation of "floating" managers throughout this decade has allowed investors to dodge major downticks in the market. Indexing makes sense for a portion of your portfolio. However, if we find ourselves in a sideways market for another 5 or 10 years, I'd prefer a nimble manager who can dance around the volatility and hedge out my downside risk.

August 23 2010 at 8:53 PM Report abuse +2 rate up rate down Reply
1 reply to Patrick's comment

There is no evidence that "nimble managers" outperformed the indexes in 2008, which was a terrible bear market. Here's a quote from a Standard and Poors study, which you can find at: "The belief that bear markets favor active management is a myth. Amajority of active funds in eight of the nine domestic equity styleboxes were outperformed by indices in the negative markets of 2008.The bear market of 2000 to 2002 showed similar outcomes." Proponents of active management keep repeating the same mantras. They should look at the hard data instead.

August 23 2010 at 10:10 PM Report abuse rate up rate down Reply

I'll have to second sarah56123 .... the only people who lose money in the stock market, including funds invested with Fidelity or anyone else, are those who are greedy or don't know how to invest (which I think is 80% of people, unfortunately) If you can't spend at least 100 hours learning about how investing *really* works, stick to fixed income products. :-) I don't say this to be mean, its just reality, don't get involved with something you know nothing about. The same rationale holds to owning a home... 50% of Americans should stick to being'll be better off.

August 23 2010 at 8:36 PM Report abuse rate up rate down Reply

For those younger employees I want to point out something about those with major financial losses in their 401ks; (I realize many of you don't get this benefit and haven't for many years). When the stock market was in it's high level; I believe it was 14,000 plus, it held at that level for a full year. This gave all of these 401k holders a full year to safeguard their money; by going on line and changing it to a money market in what takes seconds. They did not do this. The weath at this high was a very large amount; they noted it on the news. What you can learn from this, is to always take some profits and walk. It's better to say you made a good return and save it, then to risk losing such large amounts. You know the range now, so if and when it climbs remember to do this. The so called most professionals in the workplace are also among those who did not do this. Job title and pay is often merely a sign of a trained individual in a field of which some just happens to pay well; these same people could make major mistakes handling retirements and real estate. One of their problems is that they have a second income and they're too confident; life is too easy. Another is that they figure, it's worked so well so far, they'll keep their trust in it. Something to keep in mind; whenever there's big money involved, there's alot of sharks all over the place.

August 23 2010 at 8:21 PM Report abuse +1 rate up rate down Reply

I was layed off from a job after 13 years in 2000. That was the first year that the FEDS changed the law allowing rollovers of 401ks into IRAS. For the next 3 or 4 years I bought/sold stocks with it, skimmed the profits and it got me through a really hard time. Bottom line, the freedom I had being able to manipulate MY money and Fidelity saved my butt. Fidelity did what I asked, when I asked, without alot of B.S. Sure I paid extra taxes at the end of the year, but at a lower income which balanced out. Fidelity treated me with respect and dignity when I needed it and gave me the benefit of the doubt, win or lose, that I was intelligent and mature enough to handle MY OWN HARD EARNED MONEY. I sure wish I could say the same about what the FEDS are doing with MY MONEY they took for social security. I guess i'll find out in about 12 years. Of course, I think the FEDS have invested wisely in my early death. ha, ha. Gotta quite smoking.

August 23 2010 at 8:17 PM Report abuse rate up rate down Reply