April 28, 2025

This paid piece is sponsored by Marsh McLennan Agency.

There are five persistent misperceptions regarding 401(k) plans that might give employers and participants reason to question how good a retirement savings vehicle those plans actually are:

1. High fees: 401(k) plans have high administrative and investment fees that can significantly erode retirement savings over time.
2. Limited investment options: Participants often have a limited selection of investment options.
3. Inadequate contribution rates: Many employees do not contribute enough to their 401(k) plans.
4. Fond memory of pensions: Pensions often are viewed through rose-colored glasses as the retirement option the vast majority of Americans relied on.
5. Employees lack financial literacy: Many employees lack the financial knowledge to make informed decisions about their 401(k) investments.

As with most misperceptions, there is a certain amount of truth to each one. But that doesn’t mean 401(k)s are actually “broken” beyond repair. Not at all.

Clearing up the misconceptions

1. High fees?

Fees in 401(k) plans have dropped dramatically over the years. Morningstar reports that between 2004 and 2023 the asset-weighted average 401(k) fee fell from 0.87 percent to 0.36 percent, which saved investors billions in fund fees. Fees on prominent index mutual funds and ETFs are now often less than 0.05 percent.

2. Limited investment options?

The options are limited, so employees don’t have to deal with too many choices, which can cause “menu freeze” or choosing the wrong option for the wrong reasons. And because employers have fiduciary responsibility, limiting options also avoids the problem of offering untested investments such as cryptocurrency or individual stocks, which could result in costly lawsuits.

401(k) plans also have improved in providing more “do it for me” and “help me do it” investment solutions. According to a recent Vanguard study, almost all participants had access to target-date funds, and almost 80 percent had access to managed account services as of year-end 2024. Roughly two out of every three dollars contributed were invested in TDFs.

3. Inadequate contribution levels?

Employers can help here by stretching the match and providing auto enroll and match increases. And statistically, deferrals actually have increased:

• The 24th edition of Vanguard’s annual analysis of retirement saving behavior found that 45 percent of participants increased their deferral rate in 2024 — either on their own or as part of an automatic annual increase — which is the highest percentage the firm has tracked.
• Sixty-one percent of plans with automatic enrollment defaulted their employees into the plan at a rate of 4 percent or higher — a trend that has increased every year.
• Almost seven out of 10 plans with automatic enrollment had an annual escalation feature that increased the deferral percentage.

4. Whatever happened to pensions?

Pensions were once the standard for employee retirement programs. But the financial weight of pensions became too much for most companies to bear. Many employees long for the promised ease and perceived security of a pension. The truth is pensions rarely provided enough coverage for retirement and they never applied to the entire workforce.

Pension participation peaked at 39 percent of private sector workers in the 1970s, according to Andrew Biggs, a senior fellow at the American Enterprise Institute. Yet because of strict vesting rules, nine out of 10 workers never received their pension benefits.

5. Employees lack financial literacy?

This remains the area where the most work needs to be done. A PwC study found that 53 percent of employees are stressed about finances. They often don’t have the acumen to make smart, responsible financial decisions. But this is an excellent reason for employers to provide employees with good information on every aspect of their finances, including retirement, school loans, managing debt, budgeting and more.

Financial literacy is beneficial for both employees and employers. It can help lower stress, which lowers absenteeism and improves productivity; it can help attract and retain talent; and it can reduce health care expenses, according to an AB Research report.

What are the responsibilities of a plan sponsor, and what can an employer do to ensure a successful 401(k) plan?

• Strong plan governance

Includes reviewing all investment policy statement and committee documentation, training for all fiduciaries, reviewing cybersecurity practices, conducting an annual search for any terminated participants with incorrect addresses, conducting frequent fee benchmarking, periodic RFPs and reviewing the pricing impact of proprietary versus nonproprietary funds.

Why is all of that and more necessary? A strongly governed plan is likely to stay in compliance with Department of Labor and IRS regulations — and that can keep you out of the courtroom. Strongly governed plans also are more likely to be better designed for the employees with quality investment options.

• Financial wellness

In a 2023 PwC survey, financially stressed employees are twice as likely to be looking for a new job — 36 percent compared with 18 percent of nonfinancially stressed employees. Seventy-three percent say they would be attracted to another employer that cares more about their financial well-being, compared with 54 percent of nonfinancially stressed employees.

In the same survey, one in four employees identified a financial wellness benefit with access to unbiased counselors as the employer benefit they would most like to see added.

Employers who have invested in a strong financial well-being program have achieved an average return of investment of three dollars for every dollar put into the program.

What Marsh McLennan Agency can do to help

We help organizations develop and enact plan governance and fiduciary best practices, as well as identifying problems and opportunities presented by current retirement programs. We also can help prepare for Department of Labor audits. And our Prosper Wise program is the complete, unbiased and proactive method to help employees become more financially literate.

To learn more, contact Jonathan Fredman at Marsh McLennan Agency.

Find out more about 401(k) myths and realities

• What: Financial Wellness: The 401(k) debate: Are they really broken?
• When: 11:30 a.m. to 1 p.m. May 8
• Register here