An Honest Look
Interestingly, this was written by a retirement plan adviser and appeared to be directed at plan sponsors—not the average retirement plan participant, as stories warning individual investors about hidden fees abound on the pages of personal finance websites and magazines. I was hopeful that, because this one was written by a retirement plan expert, it would be more encouraging and enlightening than those mainstream articles, which sometimes vilify 401(k) plans and, sadly, may position this employer-sponsored benefit negatively to many American workers and retirement plan participants.
I read the piece through. After an early paragraph mentioned benchmarking “plan expenses,” I waited for the 401(k) fee discussion, but only a handful of the fees one might pay within a 401(k) plan were described—not a single one specific to the plans, or retirement plans at all. In fact, each fee listed and discussed was related to general investments, meaning most people would pay them in individual retirement accounts (IRAs) or even a brokerage account, as well. I felt a disconnect and was slightly frustrated by the choice of the title and phrase, “hidden 401(k) fees.”
Don’t get me wrong; the conclusion of the article was sound, reminding plan sponsors of their fiduciary duty under the Employee Retirement Income Security Act (ERISA) to ensure that their fees are “reasonable” and referencing recent fee litigation—one instance of which will have its day in front of the Supreme Court. However, I didn’t believe that the story, as written, was truly honest. Plan sponsors have many fees to evaluate, which include plan-administration, investment and transaction fees, among others. By focusing only on investment-related fees, such as 12b-1s—which would be paid in many investments outside of the plan—the author missed an opportunity to really instruct the plan sponsor searching for information. After all, when a sponsor believes the retirement plan is free, isn’t that really because he’s unaware there are administrative costs?
Too often, articles written for plan sponsors and participants focus on the investment fees, which, yes, exist and can be quite high. However, in many cases, participants pay less in investment costs in their retirement plan than they would elsewhere. Frequently, the plan sponsor, adviser, investment manager and recordkeeper come together to create a plan that, because of its size and scale, invites better “deals” on share classes than could be found in a retail IRA—delivering a major benefit for both sponsor and participant.
My concern is that, by continuing to discuss potential negatives of investing in a 401(k) plan, we send some people running to IRAs. A recent report from the Employee Benefit Research Institute (EBRI) found that 60% of individual retirement account owners had their savings in an “extreme” investment allocation in 2012, meaning less than 10% or more than 90% in a particular investment category. Of that group, one-fourth (23.7%) of IRA owners hold less than 10% in equities, 35.5% have more than 90% in equities, and 18.5% hold more than 90% of their assets in bonds and cash. They aren’t getting the benefits of the plan design and automation trends, including asset-allocated investments, that are increasingly seen and implemented in retirement plans. Further, those participants are likely paying more for the effort and saving less—missing out on a potential employer match as well.
When you help your plan sponsors look at costs, I encourage you to help them see all costs, and help participants understand the value to be had by saving through the workplace retirement programs. It’s an employer benefit, and one that, in most cases, is the only chance most Americans have to amass any significant amount of savings.