BOSTON - Excessive fees in some 401(k) plans are hurting the reputation of all 401(k) plans and shaking investor confidence in what most financial experts agree is a great way for the majority of Americans to save for retirement.
"There is a notion in the press that 401(k) investors are being hosed. This is not the case," said Michael Hadley, the Investment Company Institute's associate counsel for pension regulation, at the "Defined Contribution Investment Only Forum," held last Monday and Tuesday at the Harvard Club, and hosted by Financial Research Associates. "401(k) investors are getting an incredible deal."
The problem, Hadley said, is that the Department of Labor's rules regarding 401(k) fees are anything but simple. The rules are so convoluted, fiduciaries don't know how much they're being charged or for what.
"The big issue is that plan sponsors don't understand fees," said Paul Powell, managing director of 401(k) Advisors' southern region. "There are so many names for how providers receive revenue," including 12b-1 fees, sub-transfer agent payments, adviser revenue-sharing and sales load charges.
On top of such management fees, there's additionally a battery of front- and back-load fees, distribution charges, marketing commissions, communications fees, transfer fees, mortality changes and wrap fees-all of which have no place in defined contribution plans, said Rose Amengual, assistant director of New York City's Deferred Compensation Plan.
Hidden fees can devour tens of thousands of dollars over the lifetime of a 401(k) plan. Sixty million 401(k) plan participants pay approximately $30 billion per year in annual investment and administrative fees, Powell said. Most of these fees are being paid for out of plan assets.
Plan sponsors want to pick the best plan for their participants, minimize the resources needed to run the plans, and avoid getting sued, Amengual said. Depending on the services offered, it may be more appropriate to pick a plan with a slightly higher fee, but sponsors are still required to do their due diligence and shop around for the best product.
"Some pricing out there doesn't add up," said Lew Minsky, senior advisor for Florida Power & Light Group. However, most of it does but is not explained well either to fiduciaries or to the end investor, he said. "We need to do a better job of communicating how much it costs to provide the services we've come to expect.
"Call centers cost money," Minsky continued. "The recordkeepers are getting squeezed and want to cut back on services they provide, but we haven't seen service providers who will stand up and say, âHold on, this stuff costs money.'"
If it were left to investors, "participants will choose the cheapest plan because of costs, not because it's the best option," said Peter Gosselin, senior director and manager of defined contribution investment services for Mercer.
But like any product that is available in a wide range of quality and price, you get what you pay for.
The key to avoiding litigation and protecting your employees is to engage in a prudent process, Powell said. Fiduciaries should analyze fees and compare them with those charged by other service providers.
"Plan sponsors are willing to pay for services if they're good services," said Martha Spano, a senior consultant for Watson Wyatt Worldwide. "Recordkeepers should take note of that."
"I think we're starting to see an over-emphasis on fees," said Steven Dorval, managing director of investment and trust services for New York Life. "Fees are becoming increasingly important to plan sponsors because they want to drive down costs in their qualified default investment alternative."
"Asset-based revenue in the large and mega plan market is under attack," Powell said. "Fee litigation is leading to disclosure, and disclosure is leading to plan sponsors questioning how much is reasonable and the options for paying fees."
Fee pressure in the target-date field is inevitable, Dorval said, and a reduction of fees is a good thing. Plan sponsors should look for instances where there is clearly added value, he said.
"Market-timing restrictions lead to a reduction in flexibility," Dorval said. "If some of these new regulations require disclosure of things like revenue-sharing, people could become too confused to participate."
Gosselin agreed, adding, "If some of this goes too deep, it can be discouraging."
Clear, Concise Disclosure
Last Tuesday, the Labor Department proposed requiring 401(k) plan fiduciaries to supply investors with standard account summaries that clearly state fees, expenses and any administrative costs such as legal, accounting and recordkeeping charges-in actual dollars (see related news story, page 6).
The summaries should also list performance and comparable benchmark returns, investment options and information on how to obtain more details, including education and/or advice.
The DOL predicts the disclosure will result in $6.1 billion in savings for investors between 2009 and 2018, or an annual savings of $225 million directly related to fees due to investors becoming savvier about fees, and companies responding to the pressure to reduce them.
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