In a new report entitled “Economics of Providing 401(k) Plans: Services, Fees, and Expenses, 2006,” the Investment Company Institute (ICI) offers an argument that, because employers often pick up some plan expenses and other factors, participants get the benefits of saving for retirement at what ICI contends is a comparatively low cost.
The ICI report lays out the history and basic structure of the workplace savings programs and details the array of services the group says workers get in exchange for paying at least a portion of the plan’s operating expenses. “401(k) plans provide many American workers with the opportunity to invest cost effectively in mutual funds,” ICI declares in the report.
Factors listed by the report as affecting “the relatively low expense ratios incurred by 401(k) plan participants” include:
- competition among mutual funds and other investment products to offer shareholders service and performance;
- plan sponsors’ decisions to cover a portion of the 401(k) plan costs, which allow them to select funds or share classes with less built-in servicing economies of scale that a large investor such as a 401(k)plan can achieve;
- performance and cost-conscious decision-making by plan sponsors; and
- unlike shareholders outside of 401(k) plans who typically pay for the assistance of a financial adviser when investing in mutual funds, there is a more limited role for such financial adviser services inside these plans.
Generally, because many plan sponsors pay a larger share of plan fees than legally required, participants reap the benefits, ICI argues.
“Many employers voluntarily cover some or all of plan-related costs that legally could be shouldered by the plan participants,’ the group asserts in the paper. “Any costs not paid by the employer, which may include administrative, investment, legal, and compliance costs, are, effectively, paid by plan participants. As a result, the employer’s decision to pay a portion of plan costs can have a significant impact on the 401(k) plan fees charged to plan participants. Generally, when more of the plan costs are subsidized by the employer, the costs paid by plan participants are lower.’
The ICI report is here. http://www.ici.org/stats/res/fm-v16n4.pdf