"Fees are just the most problematic thing out there," says Robert Hiltonsmith, a policy analyst with Demos, a research and policy organization. Participants are on the hook for fees associated with the investments they choose, but they also likely get dinged for the administrative costs of running the plan.
That comes as an unpleasant surprise for many. A recent regulation requires that plan providers tell participants how much they are paying in fees, but it hasn't made much difference, according to Hiltonsmith.
"Disclosure hasn't made a darn bit of difference. Data show that it hasn't really," he says. The number of retirement plan participants who said they didn't know how much they paid in fees was unchanged from last year at 50 percent, according to a survey released in March by LIMRA, a consultant to insurance and financial services companies. The good news is that fewer people believe they pay no fees in their 401(k) plan; that number fell from 38 percent in 2012 to 22 percent this year.
Though participants may be slow to catch on to the real implications of fees in their 401(k)s, disclosing the cost could be making plans cheaper overall through market forces.
"It's gotten more competitive, and I think that disclosure is key," says Judy A. Miller, director of retirement policy at the American Society of Pension Professionals & Actuaries, or ASPPA.
Because employers are on the hook for choosing the plan provider as well as the investment choices within the plan, "It's that decision point that sets the parameters. It's much more of a competitive market," Miller adds.
Competition and transparency could drive costs lower over time, as employers catch on to the fact that their plan has to offer low-cost investments and efficient administration. Strictly regulating which salespeople and advisers have a fiduciary duty to plan participants could also impact fees in a big way.
"Some of the old, clunky sales practices are still there," says Greg Carpenter, founder and CEO of Employee Fiduciary, a 401(k) plan administrator. "The back-slapping guy at the golf course and you sign the deal at the 18th hole -- that is the dinosaur way of selling and servicing. It's getting competed away, but it's still out there. There are still people out there with lousy deals on their 401(k)."
The Department of Labor is expected to release a proposed rule extending the definition of who is a fiduciary to retirement plans. That could really help, says Hiltonsmith.
"Both brokers and investment advisers all the way up to the plan custodians are incentivized to pick higher-fee funds. Their priority is to maximize profits. Often custodians will pick funds that give them the highest revenue sharing, or financial advisers get some commissions from selling funds. If we turn that around, I think that could have a large effect on fees," he says.
Leakage a problem
As much as everyone mourns the days of defined contribution plans that paid all or a portion of an individual's retirement, defined contribution plans such as 401(k)s offer portability the way pension plans never did.
When an individual leaves one job, they're able to take their 401(k) account with them by doing what is called a rollover. The money in their account can be rolled into their new employer's plan if that plan permits. Or the money can be moved into individual retirement accounts, or IRAs, that are specifically designated for rollovers.
But this portability feature can present a temptation since there's no requirement to put the money back into a qualified plan. It's a big problem, "especially for younger participants who actually cash out between jobs, and some or all of that doesn't make it into another plan," Hiltonsmith says.
Hardship withdrawals and loans are other sources of plan leakage. And many participants dip into their retirement fund to foot the bill for their kids' educations.
Individual responsibility and choice are integral parts of the system, but if millions of individuals make bad savings decisions, it won't just be their problem; it will be everyone's in society.
"The data is showing a serious problem. According to the Employee Benefit Research Institute, 44 percent of boomers and Gen Xers don't have enough money to meet needs in retirement," says David Littell, co-director of the New York Life Center for Retirement Income at the American College in Bryn Mawr, Pa.
The gap between the amount working-age Americans need to retire and what they actually have may be as high as $14 trillion, according to a study released in June by the National Institute on Retirement Security, or NIRS.
Getting everyone on board
Whether the plans should be scrapped altogether or simply improved upon, they are an incomplete answer to the nation's retirement problem: Nearly half of the working age population, 45 percent, have no retirement account at all -- neither an IRA nor a 401(k)-type plan, according to the NIRS study.
While nearly anyone can open an IRA, the accounts miss the secret ingredient to the 401(k)'s recent success: the employer nudge through automatic enrollment.
Research in the field of behavioral finance has found that inertia can work for retirement plans. Enrolling employees automatically into 401(k)s has boosted participation in employer-sponsored plans, according to a recent study by human resources consulting firm Aon Hewitt. Participation rates are at an all-time high, thanks to the increase in automatic enrollment. In 2007, only 34 percent of employers used automatic enrollment; today, that number is up to 59 percent, the study found.
In recent years, President Barack Obama has proposed mandating that smaller companies sign up their workers for an automatic IRA plan. The idea is currently being tossed around Congress in the form of the Automatic IRA Act of 2013. Employers with more than 10 workers would be required to sign employees up for IRAs and deduct contributions from paychecks automatically, though employees could opt out if they wanted.
Automatic enrollment is one of the pieces to the retirement puzzle that retirement researchers have found to work.
"The structure is the structure. You're not going to have a different one, but we've been learning how to make the pieces work better," says Miller.
The 401(k) may not be perfect, but until someone figures out something better and implements it, these employer-sponsored plans are the best answer we've got.