In this new age of fee disclosure, it may be
surprising to some that more than one-quarter (26.6%) of respondents to
PLANSPONSOR’s 2013 Defined Contribution (DC) Survey do not know the approximate
average expense ratio of all investment options in their plans.
Not quite as surprising is the fact most of the respondents
who do not know are among the smaller plan sizes group. On average, 38% of
respondents with plan sizes less than $25 million do not know the average
expense ratio of all plan investment options. This compares to 13% of
respondents with plan sizes greater than $50 million.
The survey also found, for the 2012 plan year, only 55% of
respondents calculated the total fees (all sources) paid to their DC
providers/recordkeepers. Among those who calculated fees, 68.7% benchmarked
their fees against similar plans. It is important to note that 2012 was the
first year fee disclosures were formally required by the U.S. Department of
Labor, but Brian O’Keefe, director of Research and Surveys at Asset
International, publisher of both PLANADVISER and PLANSPONSOR, finds these results surprising.
“In today’s world, consumers have become very adept at price
comparison shopping for products and services, so I somewhat expected sponsors
would exhibiting similar behavior related to the services they are paying for
from administrative providers,” he says.
O’Keefe
notes another concern might be the objectivity of the comparisons that are
being used as a combined 70% of those who calculated fees and benchmarked their
fees against similar plans used either their current recordkeeper (27.1%) or
their current adviser (43.0%) to benchmark their administrative costs.
“Although recordkeepers and advisers may have access to data from other
clients, that data may have a selection bias in that it shares a connection to
the recordkeeper/adviser, so sponsors should make sure they understand the
source of the comparative data,” he adds. “Contracting an independent company
with no affiliation to the plan provides the highest level of comparison
certainty, but only about one in ten (11%) of respondents to the survey pursued
this strategy.”
According to PLANSPONSOR’s "2014 Plan Benchmarking
Report," overall, 26% of DC Survey respondents indicated the average
expense ratio of all investment options in their plans is 50 basis points (bps)
or less. Thirty-seven percent report their average expense ratio is greater
than 50 bps to 100 bps. More than 10% said their average is greater than 100
bps. As expected, a greater percentage of smaller plans than larger plans have
higher fees; 15% of plans of sizes $50 million or greater indicated their
average expense ratio is greater than 100 bps, compared to 64% of plans of sizes
less than $50 million.
Overall, two-thirds of respondents indicated they formally
review actual administrative costs/fees annually. More than 10% said they do so
every one to two years, and 9.9% do so every two to three years. Four in ten
(41.5%) of DC sponsors, overall, reported their organization pays for plan
administrative/recordkeeping costs not covered by investment revenue. Twenty
percent said participants pay via fixed costs billed to their accounts, and
17.8% say participants and their organizations share the costs. Nearly 13% said
all plan fees are paid via revenue sharing.
Four in 10 DC Survey respondents indicated their advisers
are paid a percent of plan assets, 21.7% said advisers are paid a
monthly/annual retainer, and 4.3% reported advisers are paid a per participant
fee. One-quarter of DC plan sponsors do not know their advisers’ fee
arrangements.
The
"2014 Plan Benchmarking Report" features proprietary data collected
in late 2013 by PLANSPONSOR in its annual Defined Contribution (DC) Survey. The
report highlights various plan design features and outcomes of more than 5,300
U.S. DC plans. Information about how to purchase the report is here.
President Obama raised both hopes and eyebrows when he introduced new proposals for combating America’s retirement crisis during his fifth State of the Union address.
About halfway through the annual policy speech, after
touting the U.S. energy boom as a driver of job growth and pushing for better
wages for low- and middle-income workers, Obama turned to a topic he has seldom
addressed so far in his presidency—retirement security.
“Today, most workers don’t have a pension,” Obama said. “A
Social Security check often isn’t enough on its own. And while the stock
market has doubled over the last five years, that doesn’t help folks who don’t
have 401(k)s.”
To combat this, Obama says he will direct the United States
Treasury to create a new way for working Americans to start their own
retirement savings, called a “myRA.” He described a myRA as a new savings
vehicle that encourages workers to save for retirement by offering, as Obama
put it, “a decent return with no risk of losing what you put in.”
Concrete details about the myRA proposal were few in the
speech, but according to supplemental
material published alongside Obama’s address on the White House’s
website, a myRA savings account would be offered through a familiar Roth IRA
arrangement, and the account’s principal would be backed by the U.S.
government.
Contributions, under the Roth-like arrangement, would not be
tax-deductible, but future earnings at the time of withdrawal would be tax
free. Workers using a myRA will earn interest at the same rate as the federal
employees’ Thrift Savings Plan (TSP) Government Securities Investment Fund.
The
myRA would be open to households earning up to $191,000 a year through their
employers. Employers won’t incur any cost to offer the MyRAs, according to the
White House. Workers will be able to save up to $15,000 before transferring to a private Roth IRA.
In a conference call with reporters a day after the State of
the Union address, White House officials said the new savings program will be
run by a private financial services firm to be chosen by the Treasury through a
competitive bidding process scheduled to start in the months ahead.
David Levine, a principal at Groom Law, which specializes in
IRA and retirement savings taxation issues, tells PLANSPONSOR much of what the
president proposed is not, in fact, new.
Levine says the administration has quietly been pushing for
a long time—since the earliest days of the Obama presidency—the concept of the
auto-IRA. He even included the concept in policy statements made before he was
elected as President in 2008.
“We’ve had the dial stuck for a while in terms of the
percentage of the workforce that has access to and participates in retirement
plans,” Levine says. “The myRA is basically another attempt to increase the
coverage level, and I think that’s not a bad thing. The important question is,
how is this program going to operate?”
Levine adds that, between the Treasury department’s ability
to issue bonds and its ability to issue regulatory guidance on Roth IRAs, the
Administration does actually have the power to launch the myRA program without
depending on Congress.
“This move fits quite well into his theme of, ‘I want to
work with the Congress but if need be I’ll work around it,’” Levine says. “He’s
clearly trying to appeal to the populist view that’s becoming more and more
prevalent beyond our industry.”
And
skipping Congress is probably the right move for Obama. There have been a
number of bills and proposals to expand IRA access that have languished in the
divided House and Senate (see “Mandatory
Workplace IRA Bill Returns”).
Like others working in the financial services sector, Levine
says the more controversial suggestion for improving Americans’ retirement
readiness came next in the speech, when Obama urged lawmakers to take
action to change “an upside-down tax code that gives big tax breaks to help the
wealthy save, but does little to nothing for the middle-class Americans.”
The proposal caused a small flurry of responses from
financial services firms, many voicing support for expanding IRA access but
opposing the notion that the existing 401(k) tax structure favors the wealthy.
For instance, in a statement released just minutes after
Obama’s speech concluded, The Investment Company Institute (ICI) says it
welcomes the Administration’s decision to offer a new savings vehicle to
American workers, but it also vehemently opposes changing the tax code.
“It is with regret and deep concern that we heard his
comments about reducing the retirement tax incentives that have been part of
the foundation for the success of the private sector retirement system for all
Americans, including hard-working middle income Americans,” the ICI writes.
A spokesperson for the ICI declined to elaborate on the
organization’s position, but she pointed to a recent blog post published
by the ICI’s chief public communications officer, Mike McNamee, to explain her
group’s opposition to Obama’s proposal to change the way retirement savings are
treated for tax purposes. In short, McNamee argues the perception that tax
treatment of 401(k)s benefits only the wealthy—or, more broadly, that the
benefits are driven by a saver’s tax bracket—is based on a fallacy.
“The tax treatment of retirement savings—tax deferral—is
often lumped together with tax deductions,” he writes. “But a deferral of tax
is neither a deduction nor an exclusion. Tax deferrals reduce taxes paid in the
year of deferral, but increase taxes paid in the year that the income is
recognized. Deductions and exclusions, on the other hand, reduce taxes paid in
the year they are taken.”
Because of this difference, McNamee argues the benefits of
tax deferral cannot be calculated in the same manner used to determine the
benefits of an exclusion or deduction.
“This distinction is important because misconceptions about the
tax benefit of deferral could lead to misguided and harmful policy proposals,”
McNamee says. “Many analysts apparently don’t understand this difference, and
thus fall victim to the trap.”
McNamee goes on to argue that an individual’s age is
typically more important than his marginal tax rate in determining how much he
will benefit from the deferred taxation of compensation contributed to an
employer-provided retirement plans, such as a 401(k).
For
example, the tax benefits from a one-time $1 contribution to a retirement
account are greater for a 45-year-old with a 15% marginal tax rate than for a
60-year-old in the 35% tax bracket, McNamee says.
A number of other industry advocacy groups voiced a similar
opinion on the second of Obama’s retirement-related proposals.
Brian Graff, CEO and executive director of the American
Society of Pension Professionals & Actuaries (ASPPA), argues in a statement
that, while promoting the importance of retirement savings in the State of the
Union, President Obama “chose to attack the 401(k) plan, the primary vehicle
for tens of millions of middle-income working Americans.”
“The President said the tax incentives for 401(k) plans
primarily benefit those with higher incomes,” Graff says. “In fact, 80% of
401(k) plan participants are middle class Americans making less than $100,000.
The President said the tax incentives for retirement savings are "upside
down"—meaning they mostly go to the wealthy. In reality, households making
more than $200,000 only get 17% of the tax benefits from 401(k) plans, while
middle income households enjoy the majority of such tax benefits.”
Graff voiced frustration that lawmakers often fail to
recognize the retirement savings tax incentive is not even a permanent
write-off like most other tax incentives—instead it is a deferral.
“A dollar deferred today is a dollar taxed tomorrow,” Graff
says. “And the tax incentive for employer-based retirement plans comes with
nondiscrimination rules and limits on contributions and compensation that
ensure the benefits are broad-based and do not primarily benefit the wealthy.
It is unconscionable that this incentive—which was so carefully constructed to
ensure that benefits are broad-based—is so blithely maligned.”
ASPPA is also negative on the MyRA proposal, claiming the
starter IRA accounts would “do pitifully little to replace the significant
benefits that millions of American workers get from their employer-sponsored
plans if the tax incentives for retirement savings are reduced.”
A
full transcript of Obama’s address is available here.