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Class warfare in your 401(k)?

The statement that a sandwich from the local sub shop should cost exactly $5 for everybody in America, rich and poor alike, is fairly uncontroversial. The statement that everybody in America, rich and poor alike, should pay exactly $10,000 a year in taxes might embroil the speaker in a pretty heated argument. Ian Salisbury’s story today on MarketWatch, regarding a debate over a heretofore obscure 401(k) fee, brings both hypotheticals to mind.

Until recently, most 401(k) plans charged account-holders a percentage of their assets each year for management and administration, with the effect that bigger account-holders and long-time plan members have subsidized smaller and newer ones. Now, in the face of regulatory changes, more employers are moving to an “á la carte” system, and many are charging flat-rate management fees of, say, $100 a year for each participant—the rationale being that a 401(k) account costs roughly the same to administer whether it’s big or small. In other words, joining a 401(k) plan is like buying a hoagie.

Of course, while a $100 fee is a rounding error in a $250,000 account, it would represent a serious bite out of the savings of a younger investor or a new employee whose balance is, say, $5,000 or less. That’s why some consumer advocates argue for keeping the old model, where those who have more pay more. In other words, 401(k) plans should be more like the current federal tax system (presumably minus several thousand pages of loopholes and footnotes). “It’s the same debate we’re having at the national level,” Mike Alfred, co-founder of financial research firm BrightScope, tells Salisbury. “It depends on whether you are liberal or conservative…it’s who pays what.” (Based on the remarks in the comments section, Alfred’s polarized-national-opinion analogy is apt.)


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About Encore

  • Encore examines the changing nature of retirement, from new rules and guidelines for financial security to the shifting identities and priorities of today’s retirees. The blog also explores news that affects retirement, from the Wall Street Journal Digital Network and around the web. Lead bloggers are reporter Catey Hill and senior editor Jeremy Olshan. Other contributors include The Wall Street Journal’s retirement columnists Glenn Ruffenach and Anne Tergesen; the Director for the Center for Retirement Research at Boston College, Alicia Munnell; and the Director of Research for Pinnacle Advisory Group, Michael Kitces, CFP.