Schlichter’s Retirement Crisis: ‘401(k) Industry Complex’

Jerome Schlichter may be the most polarizing person in the DC industry. Some demonize his efforts to sue plan sponsors and service providers, opening what some view as a floodgate of lawsuits; others think his efforts have led to helpful reforms and practices. In a thoughtful editorial in InvestmentNews, Schlichter reviews the main issues he has found in DC plans and what caused them.

The retirement crisis is not just about people failing to save enough, Schlichter writes; the issue is what he calls the “401(k) retirement complex”  — a convergence of interests that has caused significant problems. The causes of those problems include ignorance, plan sponsors asleep at the wheel and self-dealing by plan sponsors and providers, as well as outright deceit. As a result, he writes, DC plan problems include:

• Excessive fees, raising the need for greater transparency and simplicity — 401(k) plans are not user friendly.
• Overly complicated portfolio strategies — too many options can be debilitating to participants.
• Retail pricing in an institutional world through misuse of share classes.
• Blatant conflicts of interest where DC plans fund other corporate initiatives and unjustly enrich some providers.

Some may argue that 401(k) fee lawsuits just enrich the lawyers and take money out of the system. But there’s no doubt that they have awakened many plan sponsors and providers to the need for greater diligence in the administration of their duties — resulting in lower fees. 

While the industry has come a long way, in large part due to the help of behavioral economists like Benartzi and Thaler, to many employers and plan participants, 401(k) plans are still not user friendly. 

And finally, most plan sponsors have limited access to unbiased and qualified training and education to help them design and administer their plans properly and efficiently. 

In an interview with Schlichter in the Winter 2013 issue of NAPA Net the Magazine in which he was named one of the indistry’s top 10 innovators, he noted that when he started looking at 401(k) plans, he was shocked not just by the abuses of plan sponsors and how they treated their DB and DC plans differently, but also by the fact that the DOL had not taken action. Sometimes it takes an outsider to point out the obvious — in other words, the fish are the last ones to notice the water.