Fee Hit Piece — Why Transparency is Important
By David Wray
Apparently, those attempting to impose a mandatory, government-run retirement plan on America’s workers are working to discredit the 401(k) system, which they fear as an alternative approach. An example is a group called Demos, which has produced a totally bogus study purporting to find that fees paid by typical 401(k) participants average 3 percent or more.Because many in the media did not fact-check the study, or at least ask for a balancing comment, we are now getting stories and even ridiculous recommendations such as the one from the Motley Fool folks suggesting that participants should drop out of their 401(k) and save in an IRA. They also suggested that if there is a brokerage option in the plan, participants should use that option rather than the plan-provided investment menu.
Because most 401(k) participants work at larger companies with the plan asset level enabling them to enjoy institutional pricing, this will force participants making these choices to pay higher, not lower, fees. If these participants are among the millions who work at very large companies and they use the plan’s investment menu, they may be paying 20 basis points or less for all services, including investment management. Then there is also the issue of losing the protection of the fiduciary oversight provided by plan sponsors.
Here are the facts. In 2011, Deloitte and the Investment Company Institute (ICI) conducted a 401(k) fee study. PSCA collaborated in this study and encouraged its members to participate. Participants in the study were required to break down the fees paid to run their plans in significant detail. Overall, the study found that the total cost of administration, recordkeeping, and investment for a median 401(k) participant was 0.78 percent (78 basis points) of the participant’s account balance, or approximately $248 for the year per participant. This is far lower than that reported by Demos. It is true that if plan assets are invested in registered mutual funds, then the trading costs are not included in the Deloitte study’s results, and the overall cost for those participants is somewhat higher, though nowhere near the cost suggested by Demos.
The fees paid by 401(k) participants have been distorted by opponents of the DC system for years. Unfortunately, we will have to live with this situation until we have sufficient fee disclosure to rebut the disinformation with universal data. I can hardly wait.