Why Defined Contribution Plans Do Not Work

Because there is extreme information asymmetry in favor of the financial industry, there is an opportunity for fraud, and as I’ve noted before, (today) If fraud can occur, fraud will occur.

Case in point, Fidelity bribing MIT to allow the financial firm overcharge the school’s employees for their retirement plan:

The Massachusetts Institute of Technology, one of the nation’s most prestigious universities, stands accused of hurting workers in the company’s retirement plan by engaging in an improper relationship with the financial firm Fidelity.

A lawsuit headed to trial in September alleges that MIT ignored the advice of its own consultants and allowed Fidelity to pack the university’s retirement plan with high-fee investment funds that ended up costing employees tens of millions of dollars. In return, the lawsuit said, MIT leveraged millions of dollars in donations from Fidelity.

MIT and Fidelity say the allegations have no merit.

The same as any employer that offers workers a retirement plan, MIT is required by law to set up investment options that are in the best interest of its employees and retirees.


Twenty years ago, MIT hired Fidelity to help manage its 401(k) plan. But the lawsuit alleges that MIT then let Fidelity include dozens of Fidelity funds with high fees — and that some charged fees more than 100 times higher than other funds that MIT could have chosen. [Plaintiff’s Attorney Jerry] Schlichter said MIT’s own outside consultants recommended shifting to a plan with lower-cost investment options, but “that advice was ignored for years.”

Meanwhile, Schlichter’s lawsuit says, MIT benefited from the excessive fees that the workers’ retirement plan paid Fidelity. Court documents allege: “In return, MIT leveraged Fidelity’s revenue stream from the Plan to secure numerous donations (over $23 million since Fidelity became the recordkeeper).”

In 2015, when the university considered other options, an MIT dean emailed the head of an MIT committee overseeing the plan: “if we’re not switching to Vanguard or TIAA Cref, I am going to expect something big and good coming to MIT,” according to the court records.

Schlichter said that soon after that exchange, “Fidelity donated $5 million to MIT.”

Seriously, we need to cap fees on tax deferred accounts.

While there may be a societal value to retirement savings accounts, there is no such value to reckless seeking alpha, nor is there a societal value to rip off retirees.

It will hit Wall Street in the pocket book, but f%$# Wall Street.

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