“401k’s are great for saving, but lousy for investing.”
You’ve probably heard me utter those words at some point.
But until just this morning I never knew why 401k investment options are always so bad.
I’ve looked at hundreds of 401k plans over the last 13 years and the one commonality they all share is
that the investment options are always T E R R I B L E ! ! !
Turns out there’s a reason!
Here’s how it works.
Human Resources needs to set up a 401k.
So they hire an investment advisor to set it up for them.
The investment advisor sets up the 401k including picking out the menu of mutual funds for the
employees to pick from.
Guess what!?
The mutual funds pay fees to the investment advisor.
The more employees invest in those funds, the more money the investment advisor collects.
So the investment advisor is incentivized to use mutual funds that will pay him the most, whether they are
actually good funds or not!
!?!??!?!
What’s interesting is what’s happened since 2012.
In 2012, the Dodd-Frank bill was signed into law and 401k’s were required to disclose all of their fees
including the mutual fund fees paid to the investment advisor.
Interestingly, around that time I started noticing more Vanguard mutual funds were being included as
part of the 401k fund offering.
And Vanguard doesn’t participate in this “pay-to-play” scheme.
I had always thought Vanguard became more popular because the world had come around to the value
of using passive index funds.
Turns out, I think it’s because the investment advisors that set up 401k’s were finally exposed!
