How Much Is Too Much?

 I want to go on record by saying that I believe in America, I think 401(k) plans are a good idea, lower fees are better for participants and regulation is sometimes needed to protect the population from the unscrupulous. 


What I would like to see is a bit more civility.  Referring to 401(k) plans as rip-offs might sell books but it has little impact on providing retirement security. 

Try this exercise; start asking your friends and co-workers if they make too much money.  You will find very few people that believe that they make too much money.  The ones that make too much money are other people. 

Yankees shortstop Derek Jeter makes about 10 times the salary of the average shortstop in the major leagues.  He makes 5 times what is paid to the next highest compensated shortstop.  Too much? 

CBS decided to make Katie Couric the highest paid new anchor in history at $15 million per year.  This is more than the entire annual budgets of NPR’s Morning Edition and All Things Considered combined.  

To the best of my knowledge all of these transactions were the result of free market bargaining.  I’ll posit that the marketplace determined these amounts.  No one put a gun to the head of Yankees or CBS executives; they believed the expenditures were reasonable. 

Any vendor that has plied their trade in the large plan marketplace will attest to the competitive environment.  If a large plan sponsor is paying too much for services received they are either incompetent or corrupt.  Call me Pollyanna, but I don’t believe these traits are commonplace among plan fiduciaries. 

I believe that the notion that there is rampant overpayment of fees in this marketplace is worthy of the Nobel Prize in Economics.  What other free and competitive marketplace exists with such results?  There are plans that probably pay more than they might be able to negotiate.  Conversely, there are some plans that, because of their desirable characteristics, pay less than market rates. 

The argument that fee arrangements are incomprehensively complex is specious.  Our industry is populated by a lot of really bright people and it should come as no surprise that most of them are more than pretty good at math.  There is no shortage of professionals willing to point out the amount of fees in their competitor’s proposals. 

Where the rub exists is our current system; as the late Milton Friedman pointed out, people are most diligent when spending their money on themselves and least diligent when spend other people’s money on other people.  In most 401(k) plans we have opted for the least diligent method. 

So why does this exist?  Because Congress said so.  The law specifically allows plan sponsors to pay reasonable expenses from plan assets.  They could have dictated that no expenses be paid from the plan or they could have substituted lowest for reasonable.  Anyone who is or has enjoyed the benefits of matrimony knows that their spouse’s definition of a reasonable expenditure is often quite different from their own.  The same degree of deviation of opinion exists among 401(k) professionals. 

I believe that the operations of most 401(k) plans have room for improvement, but I also believe that both policymakers and pundits would benefit from an examination of the marketplace.  Any one size fits all solution could have detrimental unintended consequences on small plans. 

There are about 480,000 401(k) plans in existence.  65% of these have fewer than 25 participants.  This group of plans has less than 5% of all the 401(k) assets.  The compliance costs, as a percentage of total costs, for these plans are inordinate.  Laws and regulations that make operations of these plans either more expensive or less attractive will have the unintended consequence of their elimination.  I remember after TEFRA many participants were happy that their small defined benefit plan would have faster vesting and larger contributions only to be dismayed when the plan was terminated. 

There are lots of ways to improve retirement security.  Yelling at others is not one of them. 

– Richard N. Carpenter 

Richard N. Carpenter, CPC, CEBS – President and Founder of USVI Pensions and Consulting.  Richard is the founder of the Technical Answer Group, Inc (, now owned by Wolters Kluwer Law and Business.  In the 10 years he operated TAG, he developed over 2,000 customer relationships with accounting firms, law firms, insurance companies, mutual fund companies and more than 1,500 third party administration (TPA) firms.   Prior to founding, Richard was formerly the Senior Manager in charge of the Florida employee benefits consulting practice for Deloitte & Touche.