We don't custody your 401(k). We advise on the allocation.

Before 2006, the default was earning you nothing.

Auto-enrollment into 401(k) plans started spreading in the late 1990s. But employers faced an ERISA problem: under Section 404(c), a plan sponsor is a fiduciary for default investments. If a default fund lost money, participants could sue. So sponsors chose the "safest" possible defaults — money market funds, stable-value contracts, and short-term GICs. Zero equity exposure.

The result: millions of workers auto-enrolled into 401(k)s during the 1990s and early 2000s had their contributions parked in cash-equivalents earning roughly the risk-free rate. Real returns after inflation were close to zero. The retirement plan was technically funded — but the money wasn't invested. That was the problem Washington eventually had to solve.

Congress responded with the Pension Protection Act of 2006, signed by President Bush on August 17, 2006. PPA added a new subsection to ERISA — §404(c)(5) — giving plan sponsors a fiduciary safe harbor when they default participants into a "qualified default investment alternative" (QDIA). Congress directed the Department of Labor to write the implementing rule.

The DOL published the final regulation — 29 CFR 2550.404c-5 — on October 24, 2007. That rule, which took effect December 24, 2007, defined the four QDIA categories that plan defaults have followed for the past two decades. Target-date funds became the dominant choice almost immediately.

How we got here: ERISA to Hughes v. Northwestern.

Six moments that shaped the modern 401(k) default. Note that QDIA came from legislation and regulation — not a single court case — but the fee-litigation wave that followed (Tibble, Tussey, Hughes) is what made plan sponsors start actively monitoring what participants pay.

Sean often gets asked whether QDIA exists because the 401(k) market was sued. It wasn't, not directly. QDIA came from Congress and the DOL recognizing the money-market-default problem and writing a safe-harbor rule. The fee lawsuits — Tibble, Tussey v. ABB (2012), LaRue v. DeWolff (2008), Hughes — came after and forced plan sponsors to pay attention to what participants were actually paying. The two stories run in parallel.

What DOL actually approved.

29 CFR 2550.404c-5 defines exactly four types of default investment that qualify for the fiduciary safe harbor. Plans have to pick one. Roughly 80% of plan defaults are now option (1).

Why TDFs may not be what you think they are.

Shoven and Walton (Stanford/NBER Working Paper 27971, November 2020) analyzed 612 target-date funds against their benchmarks from 2010 through April 2020. The findings are unkind to the conventional wisdom about TDFs as a "set it and forget it" solution.

The 2020 stress test by vintage

Feb 19, 2020 to Mar 23, 2020. The broad U.S. equity market fell roughly one-third. What TDF participants actually experienced:

Four findings from the Stanford paper

1. Fees are bimodal. About half of TDF assets face expense ratios under 20 basis points (these are usually passive, institutional share classes). The other half face 50-70 bps — typically active, retail share classes. The difference compounds to material dollars over 30 years.

2. Higher-cost TDFs mostly underperform their benchmarks. Low-cost TDFs (<30 bps) track their style-analysis benchmarks closely. High-cost TDFs have dispersed alpha, with a negative average — and all 35 of the worst performers in the sample were high-cost funds.

3. Past performance barely predicts future performance. A 1% per year edge in 2010-2014 predicted only 9 basis points per year of edge in 2015-2019. Strong mean reversion. High-cost TDFs with strong records still have lower expected returns than low-cost alternatives going forward.

4. A balanced fund may be a better default than a TDF. The authors' closing argument: TDFs treat age as the only variable that matters. Two 45-year-olds with identical birth years may have radically different risk tolerance, tax situation, pension coverage, and outside assets. A curated set of balanced (target-risk) funds lets people sort themselves by risk rather than by age — and aligns better with how financial planning actually works.

What an independent 401(k) fee audit actually looks at.

A 20-minute Zoom with one of our licensed advisors. Bring your most recent statement and, if possible, the plan's Summary Plan Description or Form 5500 (we can pull the Form 5500 for any public plan). Here is what we look at, in order.

What we don't do

We don't custody your 401(k). The plan's recordkeeper (Fidelity, Vanguard, Empower, Principal, etc.) keeps your account. Your employer remains the plan sponsor. We're an independent fiduciary who advises on the allocation inside your existing plan, using the fund menu the plan offers. If there's a rollover opportunity — in-service distribution, separation from service, or plan termination — we'll evaluate it separately. But the first conversation is almost always "what should you own inside the plan you already have?"