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Another Fee Article: Another Distortion

07/15/2012

The July 12 issue of Fortune includes an article “Is your 401(k) ripping you off?” As has been the case with 401(k) fee reporting over the years in this article 401(k) plan fees are presented as if the fees at small companies are representative of 401(k) fees generally instead of reporting that for most 401(k) participants low fees are one of the advantages of investing in a 401(k) plans.

Unfortunately, I am quoted in a way that makes it appear I agree that participants in 401(k) plans are significantly overcharged. My comments in the article were taken out of context. What I said is the 401(k) plans of larger companies provide participants with the lowest investment costs of anywhere in the world. Typically these plan charge participants 30 basis points or less for all plan related services. Some charge as little as 1 basis point. The cost of similar services retail would be more than 100 basis points or more.

Where I said there will be change, and there will be a lot of it, is at smaller companies where sponsors have not renegotiated the fee arrangements since the plan was established.  Because fees are charged as a percentage of plan assets, the percentage must be much higher when the assets in the plan are virtually non-existent, as during the first five years of operation.  However, over time the assets in a plan grow and the fee as a percentage of assets should be reduced as much of the cost of running a plan is based on the number of participants.  Unfortunately a number of smaller company plans continue to have the same fee schedule today when the average account balance can be $40,000 or more as they had when the average account balance was under $5,000. In these cases there will be significant change.  However, only a small fraction of 401(k) participants are affected as most 401(k) participants work at larger companies.

The continued unwillingness of those in the media to properly report on 401(k) fees astounds me.