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401(k) Fees—an Important Issue
In
recent weeks, there has been a great deal of legal and
regulatory activity around the issue of whether fees
charged by plan providers to 401(k) plan sponsors and
participants are too high and too confusing. Congress
has just held hearings on 401(k) fees and is planning
legislation. The Department of Labor is drafting new
regulations around plan fee disclosure. Since September
2006, more than a dozen lawsuits have been filed
alleging that 401(k) plans are overcharging
participants. Furthermore, the most recent 401(k)
Exchange Survey of Plan Sponsors found that across all
market segments the two leading indicators of
dissatisfaction were (1) Fees and (2) Education; and by
a considerable margin over the next five areas of
concern.
It
is not surprising that these two topics together lead
plan sponsor dissatisfaction levels today. It has
always been difficult for plan sponsors and participants
to compare costs or understand what they are paying for
their investment choices in a 401(k) or profit sharing
plan. With the additional public scrutiny retirement
plan fees are receiving, it will be increasingly
important for financial advisors to communicate what fee
related reductions are being taken from participants’
accounts. Perhaps even more important, financial
advisors should have recommendations about how plan fees
can be controlled or reduced and how the advisors’ value
can be enhanced to the plan and its participants.
Asset Allocation—an Expensive Solution
The popularity of asset allocation and target date funds
in recent years has been dramatic. This growth may be
fueled further as guidelines from the Department of
Labor support risk based asset allocation or target date
funds as appropriate default choices for automatic
enrollments. Also, more and more plans are choosing to
offer a managed account option where asset allocation
advice is provided by a financial advisor or outside
third party. The catch is that each of these types of
investments usually carries the highest expense ratio in
the plan (often exceeding 1.5%) or in the case of
managed accounts, additional fees. These costs are
always charged to the participant.
How can advisors help to
bring down the cost of effective asset allocation for
participants?
Asset Allocation—a Low-Cost Solution
If
the goal is adequate diversification and effective asset
allocation for participants--cost must be considered.
Easy one-fund choices simplify education and help the
enrollment process greatly, but are expensive. An
alternative is to recommend a fund line up that offers
both
low cost and the opportunity for full diversification
across all asset classes simply. Using low-cost
index funds allows a financial advisor to focus on the
most important decision: asset allocation, not
individual funds. According to the Profit Sharing
Council of America the average number of funds in a
participant’s account is currently five. Many
financial experts that rely on index funds counsel that
selecting a minimum of four broad market index funds
will provide adequate diversification for the majority
of plan participants—and at a much lower cost than a
typical asset allocation or target date fund.
Add Value, Not Cost
Financial advisors are being challenged to increase
their value to their retirement plan clients.
Advisors who consider offering alternatives that lower
fees and simplify the asset allocation and education
process will be winners for their clients and their
business. That alternative is a fund line up of low-cost
index funds and a focus on appropriate asset
allocation.
For more information about Pentegra Retirement Services’
institutional index fund lineup or to receive our
publication, “The Case for Indexing: Debunking the
Active Management Myth” contact Gwen Burroughs, Chief
Marketing Officer, at 800-872-3473, or email
gburroughs@pentegra.com.
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