What this country needs is a $1 war tax on gasoline, but that is politically unacceptable.
The thought of a 33 percent increase in gas prices drives voters nuts. However, about 50 million 401(k) participants are experiencing about a 20 percent increase in their 401(k) costs every year, and until recently, we weren't hearing a peep out of them.
Unlike the gas pump's scrolling dollar signs, the 20 percent increase is a silent killer of retirement plan values. Nobody ever receives a bill or writes a check for this ever-increasing cost.
The predictable outcome of committee hearings led by Rep. George Miller, D-Martinez, will be more disclosure of participant fees in 401(k) plans. The byproduct with real value, however, will be an illumination of the extent to which company decisionmakers choosing 401(k) plans for their employees operate under a cloud of conflicting interests.
This is only becoming too apparent with the lawsuits today against some major companies such as Boeing, Caterpillar and Kraft Foods.
In such cases, where Fidelity and Principal Life are also defendants, the contention is that employee participants have been charged an "unreasonable amount" in fees while the plan sponsors received "free administration and human resource services."
Basically, a percentage of assets has been charged in these huge plans for services whose actual hard-dollar cost is only attributable to each participant -- as opposed to each dollar of investment.
Consider that a cost for keeping track of 5,000 participant accounts is fixed from year to year. We could concede that it probably does rise by a factor of 3 percent based on inflation and the rising costs of running a business.
In fact, the development of computerized, seamless electronic record-keeping environments has actually dropped the cost of keeping track of and investing money, but the additional services provided in the way of Web-based access and information probably justifies what should have been an increased per-participant cost of 3 percent per year.
In the face of these predictable, reasonable costs, we have the financial services industry's fees based a fixed percentage of the dollars in the plan. This means that gross revenue billed to a plan is growing exponentially.
If markets rise by an average of 10 percent per year and employee participants contribute new money at a rate that is typically about 10 percent of a plan's existing asset base, the plan is gaining in value at a combined total of 20 percent per year.
At a fee equal to, say, 1.5 percent of assets, the vendor's revenue is increasing at 20 percent, but their costs are rising by only 3 percent.
What a great business model. Not surprisingly, the world's most profitable industry doesn't think anything needs to change.
That's why there were about 50 of its lobbyists in the hearing room two weeks ago when I testified in Washington. The concern is that any proposed government regulations calling attention to this phenomenon will "create too much cost for compliance."
For some people, government regulation of any type is just inherently bad. However, if I (like the class-action plaintiffs) happened to be approaching retirement with $200,000 in my 401(k), I would like to know that the 1.5 percent, or $3,000, that I was being charged had someone trying to keep it from rising to $6,000 per year as my money doubled to $400,000 through compounding and contributions over the next five years -- and to $12,000 as it doubled again, to $800,000, in the five years after that.
If I were a business owner now with an expensive plan, I would be shopping for a better deal. Meanwhile, beware of a growing epidemic of industry representatives who break securities laws by proposing that a new collection of mutual funds, based on past performance, will more than compensate for additional hard dollar costs to participants.
Out of 11,000 available mutual funds, even an amateur investor with a computer and the benefit of hindsight can find funds in every category that beat an existing selection.
It does pay to have funds with good performance, but you can offer them in a plan charging reasonable fees amounting to 0.5 percent on average.
In the example above, reducing those fees by 1 percent will add 25 percent more to the account balances quoted above.
The $800,000 becomes $1 million.
The lawsuits seizing on this have gained traction because the error in judgment is quantifiable and in the billions.
A word to the wise is to be proactive before the "trickle down" aspect of these lawsuits starts impacting smaller plans.