Capital Wealth · Planning · The 401(k)
Most people never picked their 401(k) investments. They were placed in a default by a rule written in Washington in 2006, and nobody has looked since. Here is where that default came from, what the law actually requires, what the research says it costs — and the one line on your fee disclosure worth finding tonight. When you want the disclosure itself read line by line, the sibling page — the 401(k) Fee Disclosure Review — walks a real one, table by table.
| What happened | What it means for the account you have now |
|---|---|
| Before 2006, the default was cash. Employers feared being sued, so auto-enrolled savers sat in money market funds. | Years of contributions earning roughly nothing after inflation. Funded, but not invested. |
| The Pension Protection Act of 2006 gave employers a safe harbor for defaulting you into a real investment. | The safe harbor protects the employer’s process — not your outcome. |
| Washington approved exactly four defaults. One of them took roughly 80% of the market within two years. | You are almost certainly in a target-date fund you never picked. |
| Stanford drew a line at 30 basis points. Target-date funds below it track their benchmarks; above it they drift. | A good plan is cheap by design. The threshold is the test, not the villain. |
| In the real plan we read, the funds cost 0.065% — and an optional service charges 0.50% to pick among them. | 7.7 times the fund it puts you in. That is the line worth finding. |
The menu in a big plan is usually excellent, because the law made someone responsible for it. What almost nobody checks is the optional layer bolted on top — and that is where the real money goes. None of this required a decision from you, which is exactly the problem.
Automatic enrollment spread through 401(k) plans in the late 1990s, and it created a problem nobody had solved. Under ERISA, an employer choosing where to put a worker’s money is a fiduciary for that choice. If the default fund lost money, the employer could be sued. So employers chose the option that looked hardest to sue over: money market funds, stable-value contracts, short-term guaranteed accounts. Zero equity.
The result was a generation of savers who were technically enrolled and functionally not invested. Contributions went in every payday and sat earning something close to the risk-free rate, which after inflation is close to nothing. A 25-year-old auto-enrolled in 1995 and left in cash for thirty years would have finished with roughly a third of what a diversified portfolio would have produced. The plan worked. The money didn’t.
Congress fixed it with the Pension Protection Act of 2006, signed August 17, 2006, which added §404(c)(5) to ERISA and told the Department of Labor to define which default investments would earn an employer a fiduciary safe harbor. DOL published 29 CFR 2550.404c-5 on October 24, 2007, effective that December. Target-date funds took the market within eighteen months and have held roughly 80% of default assets ever since.
Read the safe harbor carefully, because the wording is the whole point. It protects the employer’s process for choosing a default. It does not promise the default is right for you. A rule written to stop employers parking your money in cash is not the same as a rule that picked your portfolio.
So the question we open every review with is the one nobody asks: when you enrolled, did you choose your allocations — or did you accept whatever appeared? There is no wrong answer. Almost everyone accepted. But a choice nobody made is a choice nobody has revisited, and that is usually where the money is.
The DOL rule names four kinds of investment that qualify as a Qualified Default Investment Alternative. A plan must pick from this list to get the safe harbor, and the market concentrated almost immediately.
| The four QDIAs | What it is | Share of defaults |
|---|---|---|
| Target-date fund | A fund-of-funds on a glide path, keyed to the year you turn 65 | ~80% |
| Balanced / risk-based fund | A fixed equity-bond mix set for the workforce, not the individual | ~10% |
| Managed account | A third party allocates for you, using age, salary and anything you tell it | ~8% |
| Capital preservation | Money market or stable value — capped at 120 days after enrollment | ~2% |
That fourth line is the tell. DOL allowed cash for 120 days and not a day more, specifically to kill the pre-2006 pattern of leaving people in money market funds indefinitely. After four months the plan must move you into one of the other three.
Notice what the target-date fund asks of you: one decision, and it is your birthday. That is its genius and its limit. Two people born the same year can have wildly different circumstances — one with a pension floor and a paid-off house, one with neither — and the glide path treats them identically. A target-date fund is a reasonable default and a mediocre plan: it is the best answer available to a question that had to be answered without meeting you — and once you have met somebody, better answers exist. We are not against the default. We are against it going twenty years unexamined, because the one variable it uses is the one variable that changes on its own.
Shoven and Walton studied 612 target-date funds against their benchmarks from 2010 through April 2020 (Stanford/NBER Working Paper 27971). Target-date funds held about $1.4 trillion at the end of 2019, roughly a quarter of all 401(k) assets. Three findings matter for anyone holding one.
One: fees are bimodal, and 30 basis points is the dividing line. Roughly half of target-date assets sit under 20bp — passive, institutional. Most of the rest sit at 50–70bp. Funds below about 30bp tracked their benchmarks closely. Above it, returns dispersed and averaged negative against the benchmark, and all 35 of the worst performers in the sample were high-cost funds.
Two: past performance barely carried. A one-percent-a-year edge from 2010–14 predicted just nine basis points a year of edge in 2015–19. Strong mean reversion — a good record does not survive a bad expense ratio.
Three: the 2020 stress test. Between February 19 and March 23, 2020 the market fell about a third. Here is what target-date holders actually lived through, by vintage.
| Vintage | Roughly who it’s for | Loss, Feb–Mar 2020 |
|---|---|---|
| 2045 and later | Age ~40 | −30 to −35% |
| 2035–2040 | Age ~45–50 | −25 to −30% |
| 2025–2030 | Five years from retiring | −20 to −25% |
| Retirement Income | Already retired | −15 to −20% |
The long-dated vintages behaved almost exactly like a pure equity fund — which is defensible at forty. The row that should stop you is the highlighted one: people five years from their last paycheck lost a quarter, in a fund named for the year they planned to retire.
The finding is not “target-date funds are bad.” It is narrower and more useful: cost predicted behaviour better than anything else in the study. A cheap one did what it said. An expensive one usually did not, and no track record reliably rescued it.
Which makes the homework concrete. Find your fund’s expense ratio and put it against 30 basis points. Most large-employer plans come in well under. If yours does, the fund is not your problem — and the next section is about what usually is.
Everything above is background. This is the part that costs money.
We read a genuine participant fee disclosure — a Department of Labor 404a-5 document dated November 7, 2025, from the 401(k) plan of a large medical device manufacturer. We have removed the employer’s name and the recordkeeper’s. Everything else is exactly as printed. The first thing to say about it is that the menu is genuinely good, and saying so is not a courtesy — it is the reason the rest of the analysis is credible.
| What the plan charges | Cost | Per $1,000 |
|---|---|---|
| Target-date fund (the default, every vintage) | 0.065% | $0.65 |
| S&P 500 index fund | 0.02% | $0.20 |
| Mid-cap and small-cap index | 0.04% | $0.40 |
| Flat administrative fee | $49/year | — per person |
| Optional management program (first $50,000) | 0.50% | $5.00 |
Look at the first row against the last. The default fund costs 0.065%. The optional service that allocates you among these same funds costs 0.50% on the first $50,000 — 7.7 times the fund it puts you in. It is billed monthly, taken straight from the account, and it sits in a different table from the fund fees, so the two are never seen side by side.
The flat $49 deserves a note too, because it is charged per person rather than per dollar. On a $500,000 balance it is a rounding error. On a $25,000 balance it is a fifth of a percent. The smallest accounts pay the highest percentage — and they also pay the priciest management tier, because 0.50% applies to the first $50,000. Both effects run the same direction.
Put it on a real account. A $35,000 balance in this plan pays about 0.205% all-in without the program, and 0.705% with it. Over fifteen years at a 7% gross return, adding $6,000 a year, the optional layer alone costs $11,958.
And the fix is not always “cancel it.” It is often “price it.” Getting an all-in cost from 0.50% down to 0.30% — a level Stanford’s research treats as the reasonable ceiling — is worth this:
| Account | Over 10 years | Over 20 years |
|---|---|---|
| $50,000 + $10,000/yr | $3,055 | $15,256 |
| $150,000 + $12,000/yr | $6,866 | $30,433 |
| $250,000 + $15,000/yr | $10,805 | $46,462 |
Twenty basis points. Forty-six thousand dollars. Nobody ever sends you that number.
Be fair to the service before you cancel it. A managed account genuinely earns its fee for someone who will otherwise never rebalance, who has real complexity, or who would panic-sell in a March-2020 week. Those people exist and this is a reasonable product for them.
But it must earn that fee every year, against a fund menu this cheap. The honest question is not “is it good?” but “is it 7.7 times better than the fund it is choosing for me?” For most people who ask us, the answer turns out to be no — and the disclosure says it can be cancelled at any time. The full line-by-line walkthrough is here →
Two Supreme Court decisions define what your employer owes you here, and both were unanimous or near it.
Tibble v. Edison International (2015, 9–0) held that an ERISA fiduciary has a continuing duty to monitor plan investments — not merely to choose prudently once. Edison was liable for leaving participants in retail share classes when cheaper institutional shares of the same funds were available. Hughes v. Northwestern University (2022) then held that offering some low-cost options does not excuse also offering imprudent expensive ones; each investment must stand on its own. “There is an index fund on the menu” is not a defence.
Which is genuinely good news, and it is why the plan above has a 0.02% index fund in it. But read where the duty lands: it is your employer’s obligation, monitored by your employer, and you will never see the analysis. It also does not reach the optional layer — nobody is required to tell you the management program costs 7.7 times the fund it selects.
1. Find the disclosure. Search your email for “annual participant fee disclosure” or log in and look under Documents. It arrives once a year and looks like junk mail.
2. Find your own allocation. Are you in the default, or did you choose? If you cannot remember choosing, you did not.
3. Total your actual expense ratios. The document lists a cost per fund and never adds up yours. Multiply each fund’s ratio by your percentage in it.
4. Look for a management or advisory fee. A separate table, often a separate page. This is the line that matters most and the one people miss.
5. Check the flat fee. A per-person charge is a much bigger percentage of a small balance.
6. Check the match and vesting. Are you contributing enough to get the whole match? Unvested money is not yours yet.
7. Check company stock. The DOL’s own warning: more than 20% of retirement savings in a single company is not diversified.
So how is this review free? Straight answer, because you should be suspicious of the other kind. The review is free and there is nothing to sign. We earn nothing from reviewing the 401(k) you have at work — we do not custody it, we cannot trade in it, and no fee reaches us from it. We are paid only if you later choose to have us manage an outside or rollover-eligible account, or engage us for planning. Many people never do, and the review is the same either way.
It follows the CFP process because that is the process: understand the circumstances, identify the goal, analyse the current course, develop and present a recommendation, implement if you want it, monitor. In a 401(k) review, steps one through five happen on a twenty-minute call, and step six is usually you clicking one button inside your own plan.
And here is what we cannot do, which is the part that makes the rest believable: we cannot change the fund menu inside your employer’s plan. We can tell you which of the options you already have is worth owning, and whether the optional layer is worth its price. That is the whole service.
The law made your fund menu cheap and made your employer watch it. Nothing in the law watches the optional layer, the per-person flat fee, or the allocation you never chose — that part is yours. Twenty minutes with the disclosure, one number against the 30-basis-point line, one look at the management fee: that is the whole audit, and the checklist above is the map.
Every layer is disclosed. None is added up for you.Twenty minutes. We will locate your administrative charge, total the expense ratios inside your funds, check whether a management fee is being deducted, and show you what the whole stack costs over your remaining working years. Nothing to sign, nothing to move.
Book a 401(k) review → Read the full disclosure walkthrough →