How to Design the Worst 401(k) Plan and Make Sure it Stays that Way

If I were to advise a plan sponsor to design the worst possible 401(k) plan, this is what I would suggest:

1.  Hire a commission-based broker who does not act in a fiduciary capacity and can only earn percentage-based kickbacks (known as 12b-1 fees) from certain mutual funds and not others.

2.  Include as many investment options as possible that nobody understands in order to give the impression that there is a lot of “work” for the broker to do.

3.  Hire a third party administrator (TPA) who receives percentage-based kickbacks (known as sub-transfer agent revenue) from certain funds and not others in addition to the flat dollar quarterly fee he bills you.  You also might want to make sure that the TPA dually acts as a commission-based broker so he can monitor his own services rather than bother to have a third party do it and puts you in a variable annuity contract to ensure he can continue to earn commissions deducted from participants’ accounts which he is allowed to do without having an investment license.

4.  Hire a record keeper who not only also receives sub-transfer agent revenue from certain funds and not others, but also is a mutual fund company who offers its own proprietary funds.

5.  Create an investment policy statement (a written description of a plan’s investment related decision-making process) and then forget about it and don’t follow it.

6.  Make sure you have no idea how much money your providers are taking out of participants’ accounts in hard dollars and that if you ask, that the disclosure is impossible to understand.  It would also be best to always think about your plan in terms of percentages rather than hard dollars because 1% always seems like a small number and therefore a good deal.  And of course, whatever you do, don’t ask for a breakdown of each service fee (advisory/broker, record keeping, administration, and custodial).  That way you will continue to never be able to make any meaningful comparison of fees and services.

7.  Also make sure you continue to keep paying your providers more money each year without them doing any more work.

8.  Always believe your trusted advisors (especially if they are your close friends or family members) when they say “Everything is fine and “in-line” with other plans in the industry.”  Don’t ever compare their fees and services (IN HARD DOLLARS NOT PERCENTAGES) to other providers because it might offend your service providers.  And if a third party ever raises questions and concerns about the unnecessarily increasing fees of your current plan and conflicts of interest that your trusted advisors have, make sure not to think about these concerns too much and forward these concerns to your trusted advisors so they can tell you everything is ok.

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