America’s $6 Trillion Problem: An Open Letter to the 401(k) Industry

By Shin Inoue, CEO, ForUsAll

The Department of Labor’s recent Fiduciary rule aimed at curtailing the irresponsible behavior of retirement plan brokers is all the evidence anyone needs that the industry has been taking advantage of its customers. That the government has to step in and say, “you have to put your clients’ interests before your own” is shameful.

The problem is that the industry has paid waaaay too much attention to investments — and making money off of them — even as retirement in America has become underfunded by $6 trillion. But, here’s the rub, that $6 trillion deficit is NOT because investment returns are poor. No, it’s because more than half of Americans don’t have access to retirement plans at work. And, for those who do have access, participation rates are too low. And when they do participate, they save too little. Even for those who do manage to get access, participate, and save, they lose $17 billion every year to unnecessary fees. As if that’s not bad enough, three out of four 401(k)s fail when audited. Clearly this industry is asleep at the wheel.

All of this has to stop. We need the courage to break the antiquated model that allows all of this to be business as usual. We need to re-imagine the 401(k) from the ground up using technology and smart design. My team’s experience shows that this can be fixed.

In the 401(k) we built for small and mid-sized businesses (SMBs), we see participation rates of 88% and savings rates of 7.4% on average. When compared to the typical SMB 401(k), that’s almost twice as much money flowing into our 401(k) that’s managed at less than half the typical cost. This is significant because it means that a 22 year old employee making just $30,000 can plan on accumulating more than $500,000 by age 65!1

Because this comes without the typical hassles for SMB employers offering a 401(k) — we take on both investment and administrative fiduciary duties — there is no excuse not to give every American a fair shot at retirement.

After years of servicing Fortune 500 companies and their 401(k)s at Financial Engines, we were struck by how the smaller guys (SMBs) were getting the short end of the stick. We didn’t buy into the notion that people need to work for a Fortune 500 company in order to have a great retirement. That’s why we founded — and named — our company ForUsAll.

We’re not the only ones that want to bring big company expertise and insights to the SMBs. Venture capital firm Foundation Capital was instrumental in helping Financial Engines get off the ground in the ’90s to revolutionize Fortune 500 companies’ retirement plans, and we’re teaming up with them again — but this time for the smaller guys. Like us, Steve Vassallo of Foundation Capital operates at the intersection of technology and design and recently led our Series A round of $9.5M.

In addition, Lawrence H. Summers, former Secretary of the Treasury for President Clinton, has joined ForUsAll as our Senior Advisor. Like us, he is outspoken in his belief that technology can and should level the playing field for everyday Americans, bringing financial services into the 21st century.

Re-designing the 401(k) from the ground up is not for the faint of heart (although I recommend it highly). Our broken retirement system requires radical changes to get back on track — time for us all to wake up and fix this.

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1This calculation assumes modest investment returns and salary increases of 2.5% above inflation each year, assumes today’s dollars, and assumes the auto-escalation ratchets up savings rates by 1% each year to 15% and remains at 15%.