In a study done by Deloitte in 2013 that studied the fees for 401k plans of various companies and found that the median "all-in fee" the cost for record keeping, administration, investment management was was .67%. which is actually a reduction in fees from 2009 when the "all in fee" was .72% which is actually a 7% decrease in 401k expenses! People complain about 401k fees but as a percentage basis realtors charge 6% yet I don't hear many people complain about that. What is interesting is that record keeping and administrative fees made up at least 18% of the total 401k "all-in fee". The rest of the fees are related to investment management fees which represent 82%. However, the report mentions that some of the investment fees include administrative/record keeping fees. Also it is important to remember that the mutual funds that many 401k plans use have their own regulations which are summarized here (as you can see this is government regulation on top of government regulation). If employees believe their 401k plans are invested in funds that are too expensive they can always tell management to switch to cheaper index funds (index funds are a fraction of the cost of mutual funds). Another compliant is that people won't know how to invest their 401k plan. I don't know everything about medicine but I know I can hire a doctor to help me with my medical affairs. In the financial world people can hire a fee only financial advisor who can provide advice on what to do. Usually financial advisors charge either a percentage of the assets they manage, an hourly rate, or a flat rate. However, they usually assist people with more than just investing (things like estate planning, insurance, retirement planning, etc.)
So let's do some quick math here. If the average 401k plan has a "all-in fee" of .72% and to be conservative we will say 18% of the fees are due to administrative/record keeping fees (thanks to ERISA) and as of 2013 401k plans held $5.9 trillion in assets this would mean that ERISA and regulations cost 401k plans at least $7.6 billion per year! I didn't even include the ERISA compliance cost related to employee benefits.
One major body of legislation that governs 401k and other employee benefits is a law known as ERISA (Employment Retirement Income Security Act of 1974). ERISA was created because if an employer went bankrupt and had to terminate its pension plan the employees of the company would lose their pension benefits. A nice summary of ERISA can be found here. The law now requires companies to set aside monies for the specific purpose of paying pensions and other employee benefits. If you are a company and have a defined benefit pension plan the ERISA law requires you to be fully funded (of course the government isn't subject to this for their pension plans).
Companies have over time moved away from defined benefit plan (were the employer was in charge of managing the investments) to a defined contribution plan (401k where employees contribute and therefore determine their own retirement). Of course the government deprives us already of our retirement fund by taking about 15% off the top (6.2% for Social Security and 1.45% for Medicare for both the employer and employee and obligates people to invest in Social Security. Not only does the government force you to contribute into Social Security but if you want to invest in a 401k under ERISA you can only contribute a maximum of $18,000 for 2015 to your 401k plan. If you are over 50 the government let's you contribute an additional $6,000 to your 401k (the government likes to let people defer more for missing out in earlier years). Not only are there limits of how much you can put in as an employee there is a limit of how much can be contributed between the employee and the company ($53,000 for 2015).
Also you shouldn't worry because the government gets to tell you when you distribute the monies. Once you are 70 1/2 monies are required by law to be distributed (known as required minimum distributions) which are taxed at ordinary tax rates. Oh and don't worry if you don't take your required minimum distribution the IRS slaps a 50% penalty tax along with taxing your distribution as well. The IRS also has rules on when distributions can be taken from a 401k without penalty (there are 16 exceptions which can be found here). As you can see the government likes to make sure they have control in how much you can save, when you can save, and when you take distributions from what you saved in your 401k plan.
Companies have over time moved away from defined benefit plan (were the employer was in charge of managing the investments) to a defined contribution plan (401k where employees contribute and therefore determine their own retirement). Of course the government deprives us already of our retirement fund by taking about 15% off the top (6.2% for Social Security and 1.45% for Medicare for both the employer and employee and obligates people to invest in Social Security. Not only does the government force you to contribute into Social Security but if you want to invest in a 401k under ERISA you can only contribute a maximum of $18,000 for 2015 to your 401k plan. If you are over 50 the government let's you contribute an additional $6,000 to your 401k (the government likes to let people defer more for missing out in earlier years). Not only are there limits of how much you can put in as an employee there is a limit of how much can be contributed between the employee and the company ($53,000 for 2015).
Also you shouldn't worry because the government gets to tell you when you distribute the monies. Once you are 70 1/2 monies are required by law to be distributed (known as required minimum distributions) which are taxed at ordinary tax rates. Oh and don't worry if you don't take your required minimum distribution the IRS slaps a 50% penalty tax along with taxing your distribution as well. The IRS also has rules on when distributions can be taken from a 401k without penalty (there are 16 exceptions which can be found here). As you can see the government likes to make sure they have control in how much you can save, when you can save, and when you take distributions from what you saved in your 401k plan.
The regulation and compliance with 401k plans and benefit plans can be burdensome. Let's go through some of the ERISA code and just see some of the regulations companies have to face (remember the regulation are passed through to workers). 401k plans must provide a summary description which is a written description of the plan and what the plan offers. Section 103 requires an annual report be filed that tells the government how the plan is operated, the assets of the plan, and the investments of the 401k plan. The plan also has to have detailed financial statements and these statements have to be made available to plan participants on a regular basis. All this information is then filed out on a form that is filed with the Department of Labor (known as the Form 5500). ERISA even tells companies who can be included or excluded for a 401k plan! Under ERISA 202(a)(1)(A) a 401k plan can exclude an individual who isn't 21 or hasn't worked a 1 year (1 year they define as working 1,000 hours in the course of a year). Companies on a 401k usually offer a matching contribution. Some people say this is "free money" of course this is utter nonsense because the company has to get the money from somewhere (the company gets a deduction for the match though-reducing their own taxes) and they could offer you more money instead of matching your contributions. Anyways, when an employer makes a matching contributing as an employees you don't have access to those monies to 401k monies under ERISA rule 203(b) until the 6th year of employment (companies can be more generous if they want and make the time period shorter).
Not only do companies have to comply with these rules but the penalties can be extraordinary burdensome. No worries Section 501 of ERISA provides what the consequences are. Under ERISA if a person violates the reporting or disclosure of information the fine can be up to $100,000 and up to 10 years of prison times. Companies can be fined up to $500,000. Section 411 bars people from even working for a benefit plan if they have convicted crimes. Oh and if you hire someone who has a criminal record you could get a fine of $10,000 and spend 5 years in jail.
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In general ERISA states that plan benefits have to be offered in a nondiscriminatory manner. This means that if you offer a benefit (health, 401k, life insurance) it has to be offered to everyone. The law evolved to this because executives were setting up company plan benefits for themselves and leaving out the rank and file employee which of course made regulators add more regulations requiring that company benefit must benefit at least 70% of non highly compensated employees (nondiscriminatory testing). Of course government plans are exempt from these nondiscriminatory tests! You might ask who are highly compensated employees (don't worry the government defines this!). For 2015, the government defines anyone who has a 5% ownership interest in a company or more than $120,000. As Walter E. Williams would say $120,000 doesn't classify anyone as rich (that isn't even Lear Jet money as he would say). The company has to look through their entire employee list and analyze total compensation and calculate whether or not they are meeting these tests (this can take time and is burdensome which forces companies to hire a 401k consulting firm to assist with the calculations). Not only does the company have to test to make sure enough people are participating in the 401k but also have to do this same testing on any benefit that the company offers employees.
Congress should consider repealing the ERISA law and allow companies in order to reduce the time, effort, and money that companies have to pay to comply with running a 401k plan and telling companies how many employees need to receive company benefits. Compliance costs/administrative cost for 401k plans are costing workers $7.6 billion a year. Why can't employers discriminate in terms of who gets company benefits and who doesn't.? Employers already discriminate on employees based on their salary. More importantly the government has no right telling companies who they have to offer benefits to, how much they can offer, and when these benefits can be distributed.
Congress should consider repealing the ERISA law and allow companies in order to reduce the time, effort, and money that companies have to pay to comply with running a 401k plan and telling companies how many employees need to receive company benefits. Compliance costs/administrative cost for 401k plans are costing workers $7.6 billion a year. Why can't employers discriminate in terms of who gets company benefits and who doesn't.? Employers already discriminate on employees based on their salary. More importantly the government has no right telling companies who they have to offer benefits to, how much they can offer, and when these benefits can be distributed.
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