Average Couple Will Pay More Than $150K in 401(k) Fees

Higher-income workers, making $90,000 a year, will pay $277,000, according to America’s Best 401k.

While industry studies have shown that 401(k) fees have declined in recent years—the Investment Company Institute recently issued a report saying they averaged 0.49% in 2016, down from 0.51% in 2015—America’s Best 401k says that data is only part of the story.

As America’s Best 401k researchers note, fee data in the retirement industry is often based on the data that plan sponsors include on the Form 5500 that they file annually with regulators. However, in its white paper, “Fees Run High for Small Business 401(k) Plans,” the company points out that 89.9% of 401(k) plans, those with 100 or less participants, file a “short” version of Form 5500, which contains very little data and excludes pertinent information such as the name of the plan provider, compensation paid to brokers and advisers, compensation paid to recordkeepers and third-party administrators, and the mutual funds in the plan along with their corresponding expenses.

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“By omitting nearly 90% of all 401(k) plans from comprehensive analysis, one might draw false conclusions about broader industry trends, such as the lowering of fees or greater access to low-cost index funds,” America’s Best 401k says. Of course, due to their far larger stature compared with the smallest plans, the relatively small number of large- and mega-sized retirement plans represent a majority of all retirement plan participants/assets in the U.S. 

To generate a more complete picture of the fees paid by all participants, America’s Best 401k reviewed the thousands of participant 404(a)(5) and plan sponsor 408(b)(2) fee disclosure forms that it has received from small businesses. The company focused on the asset-based fees withdrawn from participant accounts, finding that the average couple making $30,000 a year between them and contributing 5% each to their 401(k)s would pay $154,794 in 401(k) fees over their working careers. For a couple making $90,000 a year, that would be $277,000 in fees.

“It’s simple math that a reduction in fees, whenever possible, is important for the financial future of plan participants,” the company says.

Analyzing data from the top 11 providers to the small plan market, America’s Best 401k found that they charge an average of between 1.19% and 1.95% to participants.

“It’s worth pointing out that most of the plans had limited or no access to low-cost index funds,” the company says. “Certain plans, typically those with under $1 million in assets, are told they do not yet qualify for low-cost index funds until the asset size reaches a minimum level. Most plans in the analysis had exclusively or a substantial majority of actively managed funds. These are significantly more expensive than index funds and may also deliver a portion of their revenue to the providers or brokers in a practice known as revenue sharing.”

Citing data from BrightScope and the Investment Company Institute, the company notes that plans with assets exceeding $10 million pay an average of 0.27% in fees.

America’s Best 401k predicts that new providers will enter the market and offer low-cost index funds and actively managed funds without revenue sharing—“giving participants access to the same institutional share classes that much larger plans enjoy.” The company expects these fees to range between 0.55% and 0.75%.

The white paper can be downloaded here.

Mercer Experts Put Odds In Favor of Republican Tax Reform Success

The text of a combined bill drawing together the House and Senate proposals is slowly emerging ahead of critical up-or-down floor votes scheduled for early next week.

Speaking during a Washington Update webcast event, Mercer’s Geoff Manville, principal, government relations, observed that the effort in the House and Senate to pass tax cuts is coming to its dramatic conclusion.

According to his sources inside the Beltway, the current plan is for the Senate and House to both vote on final tax cut legislation early next week. The Senate likely will move first, based on what the Mercer team is hearing, with the House moving perhaps one or even two days later.

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“Heading into the weekend, the attention of Republican leaders has turned away from crafting a compromise towards winning support for that compromise and getting the votes that are needed, particularly in the Senate,” Manville says. “We hear that Republican Senators Susan Collins, from Maine, Ron Johnson, from Wisconsin, and also potentially Marco Rubio, from Florida, are holding off at this point from actively voicing support or opposition, and for different reasons. Senator Bob Corker, from Tennessee, is already a professed ‘No,’ but the betting is still that they can get the votes to pass both the House and Senate.”

While the full, final text of the combined bill is not yet circulating publicly, the Mercer team is “fairly confident” that few, if any, direct retirement plan taxation reform provisions will make the final proposal.

“The benefits and retirement industries seem to be coming out of this process is good shape,” Manville notes. “We’re not there yet, but it is shaping up this way, based on what is visible to us at this point. Of course, it’s not all good news—the benefits and compensation provisions are always going to be a mixed bag when major tax changes are proposed.”  

Manville further warns retirement plan professionals to “prepare for a pretty tricky period in the months ahead,” should this tax cut package ultimately be successful: “Employers will likely have some difficulty in knowing how to handle the January 1, 2018, effective date that has been assigned for many of the bills’ provisions. I know our friends in the payroll department are still scratching their heads about how they should be planning to do withholdings in the early part of next year.”

On the health care side of things, Manville expects the final tax cut bill will likely keep the Senate’s proposed repeal of the Affordable Care Act’s (ACA) individual mandate penalty. This move does not necessarily impact employers directly, but it does represent a potentially disruptive force that could alter the direction of the wider health care marketplace within which employer-sponsored health care plans operate.

“There is a separate push going on outside the tax bill to restore funding for the ACA cost-sharing subsidies the Trump administration stopped paying earlier this year,” Manville notes. “There is also interest in giving states more flexibly here and more help to set up re-insurance program for high-cost patients. However, there are real political barriers standing in the way here, so the prospects aren’t necessarily great on these issues getting stand-alone consideration in 2018.”

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