We all know that the U.S. has a looming retirement crisis. The baby boomers do not save enough for their golden years. Social Security is funded at levels that are less than ideal. Private savings in the form of Individual Retirement Accounts and tax-qualified plans like 401(k)’s also appear to be insufficient.

One of the dirty little secrets about 401(k) accounts is their under-performance — returns average 3 percent to 4 percent versus 8 percent to 10 percent for comparable 70/30 balanced portfolios. One of many factors that drive these weak returns are the drag from excess fees.

Over the years, I’ve reviewed plans that included a mess of fees for anyone who so much as looked at the accounts: Custodians, reporting firms, Internal Revenue Service filers, consultants, managers and advisers. All of these take a few basis points, rather than a flat fee per investor. The compounding of all these fees degrades returns over time.

While retirement accounts have many issues — behavioral errors and over-active management leap to mind — the British have made high fees front and center. The U.K. is debating putting a 0.75 percent cap on total fees, including an outright ban on any plans that charge more than that.

Perhaps more surprising, this proposal comes from the right-wing Conservative Party. The fear is that any retirement shortfall ultimately gets picked up by the government. High pension fees = future tax increases, according to the Tories.

A retirement plan fee of 0.75 percent of assets is considerably less than the average in the U.S. Typical 401(k) plans run between 1 percent and 2 percent, according to a recent Limra survey. Just last year, new fee disclosure rules from the Department of Labor went into effect that are letting 401(k) participants more easily figure out exactly what they are paying in fees.

Note that it is the Labor Department that governs these plans, and not the Securities and Exchange Commission. Its charge is to the employee, as workplace tax-deferred accounts are a form of compensation. In the U.S., recent 401(k) rule changes have imposed a fiduciary standard on employers. If you have not reviewed the fees your 401(k) plan charges your employees, you may not be living up to those standards.

The U.S. should watch the Brits’ experiment, and learn from it.

What are you paying for your 401(k) fees?

 

 

 

Originally published here

Category: 401(k), Apprenticed Investor

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

27 Responses to “Brits Debate Capping Retirement-Plan Fees, Should the USA?”

  1. farmera1 says:

    Great points. I agree with you.

    But going back to my working experience, it was hard to impossible to find out what the fees were. I did try and find out but without making waves which I didn’t want, I as an average employee could not find out what the fees were.

    I worked for a Fortune 500 company that overall was a good employer, but this is one thing that was hidden,/guarded, or just not available.

    Honestly I don’t know if this is still the case but in my experience ,I’ve been retired for a number of years, it was impossible to get the information you suggest. It is possible that it is much easier for the average employee to find this information now, but somebody would have to show me before I’d be convinced.

  2. rd says:

    Our 401k plan has been introducing much cheaper options over the past few years. There are only a handful of funds in it now that ar over 0.75%. I think the employer fiduciary standard and the reporting requirements are making a huge difference.

    In the 90s and early 2000s, the 401ks I was in typically had fund fees in the 1%-2% range. You had to really look deep in their offerings to ind anything less than 1%. That was a primary reason for rolling over my 401ks when I left firms so that I could tap into cheaper funds. While I could still have an overall cheaper portfolio if I rolled over my current one if I leave, It wouldn’t be critical as the difference would be relatively small compared to a decade ago.

    • catclub says:

      This is one case where the government TSP plan is yards ahead of private plans.
      All the fund costs are order 0.27% or less, and there are no fees. My understanding is that beyond the fund costs, many 401k plans also charge fees for various services, like getting at your own money.

      BTW, It is all under Black Rock, as I understand it. So Black Rock _could_ do the same for other plans.

  3. rue morgue says:

    In my experience working as an advisor with clients, the biggest issue with 401k’s continues to be the lack of investor education. High fees are maybe 10% of the problem, and even if the fees were zero it’s not going to undo the behavior of the average uninformed 401k participant.

  4. VennData says:

    But look at all the advisor’s retirements!

  5. tippet523 says:

    Should be relative to the size of a plan. A start up plan will be of no interest to anyone if fees are capped at .75. Very reasonable for plans of 3 million or more.

  6. Alex says:

    My opinion is that we need to encourage ongoing competition between money managers. We can do this by opening up the funds an employee has access to. I think a lot of fee abuse occurs because one money manager wins the “contract” for a given employer and then takes advantage of their monopoly position. What if we had a sort of “open platform” requirement, whereby an employer was required to allow access to a wider range of funds offered by at least a couple (maybe more) fund managers.

    I dimly understand this could be a paperwork nightmare for the employer (or someone), but to the extent we open things up for competition, I think the fees will go down to a more reasonable level.

    The problem I have with hard floors is they just don’t make a lot of sense for certain investment strategies, so those get priced out and investors will be given even LESS choice than they have now. An actively managed emerging market fund is just going to have higher costs than a S&P 500 index fund.

  7. theexpertisin says:

    I am against capping fees.

    I am for mandating clarity and transparency of fees and expenses to facilitate comprehension.The fee and expense structure should be so easy to understand, a cave man could comprehend it.

  8. DrSandman says:

    Maybe I’m sheltered, but my company push-sends information about every fund in the 401k and auto enrolls new hires @ 4% contributions into a 60/40 balanced fund (American Balanced R5, if I recall). We are freely able to choose Vanguard 0.05% fee index or GS ripoff large-”value” at 1.6% or something else.

    Who, exactly, are charging fees and not disclosing it on account statements? Isn’t that fraudulent?

    More importantly, who are these people who aren’t taking charge of their own life, and should we — their moral superiors — be forcing them to do what we think is right? At what point do we assume that adults no longer need diapers?

    • bear_in_mind says:

      @DrSandman:

      Who, exactly, are charging fees and not disclosing it on account statements? Isn’t that fraudulent?

      Try this on for size:

      How Retirement Fees Cost You
      http://www.pbs.org/wgbh/pages/frontline/business-economy-financial-crisis/retirement-gamble/how-retirement-fees-cost-you/

      Also, America watched a parade of false prophets like Angelo Mozilo, Jimmy Cayne, Bernie Madoff, Steve Cohen, Dick Fuld, John Corzine, Stanley O’Neal, etc., who achieved personal enrichment on a Gilded Age-scale with virtually zero concern for repercussions of their fraudulent activities. I’m not sure how that squares with your concept of, “…people who aren’t taking charge of their own life…” but I suspect you pour reality-immunity serum into your coffee each morning.

  9. Eingreifen says:

    After twenty-seven years of servicing 401(k) Plans, I agree with rue morgue. The average investor does not understand the financial markets as well as he/she should. It is a matter of education. I do not believe any government has the legal right to set fees for a private account. We already live in an over policed society. Is this an attempt to lay plausible foundations for Federal and State Governments to seize control of Defined Contribution Plans? I understand the several trillion dollars in these retirement accounts would go a long way in eliminating their deficits.

    • willid3 says:

      well there is lack of knowledge (aka education). plus there is a lack of time. if you work at some thing besides managing your 401k, you are likely working more than the 40 hour week of old. the only ones not working at least 40 hours a week, dont have enough income to be able to save any way, if the company allows them to participate at all. and most part time workers dont get benefits of any sort

      • Lyle says:

        Note that a part time is still eligible for an IRA. In addition if they are under 17.5 k single and 35 k married, then you get a non refundable credit in the amount of 50% of the first 2k you put into an IRA, You get a 10% credit from 19k to 29k single and 38k to 59k married. (the gap is a 20% credit). So as one example shows if a couple makes 34k puts 4k into iras the credit pays 2k towards the contribution. (THe contribution is also not part of the limit) With an IRA you can go to the cheap plans that have index funds and the target retrement funds that go with a .16 to .18% expense ratio.

    • catclub says:

      If the government seized those accounts the way the TSP program works, it would be all to the good of the investors. TSP is superior to almost all private 401k plans, and is run by Black Rock.

      Yes, I noticed you converted ‘seize control’ into ‘eliminating deficits.’
      Slippery slope much?

  10. willid3 says:

    well that is one problem. the fees. the other is that there is some self dealing in that some finance companies do their employees 401ks. and of course there is some issues with how companies pick who runs the 401k. not always the best one for the employees. and seems that the companies that run them, are much more interested in making the employer happy than the employees.

  11. willid3 says:

    another minor issue with them. is that with the majority making 50,000 or less, just how much can they really l’save’ for retirement.

  12. bear_in_mind says:

    A couple quick observations:

    1) Fees for deferred comp plans such as 401(k), 457(k), Keogh’s and IRA’s should all be made explicit, concise, accurate and transparent. Period. Failure to do so should be met with steep fines that double with each failure to comply.

    2) The marketing of fees on Target Date Funds should also be mandatory. The ones I’ve reviewed were HORRIBLE investments based on their sky-high fees and under-performance to benchmarks.

    3) Workers earning less than 100 percent of the median income should have no limit on their tax-sheltered contributions.

    4) A fee-cap may have an unwelcome downside in that all firms would likely price at or near that level, however, considering the current fee structure this would still probably accrue a great benefit to most retirees over current fee schedules.

  13. jd351 says:

    I would suggest reading ” How A Second Grader Beat Wall Street” . by Allan Roth. pretty straight forward. Fire your adviser.. Invest in Index funds with low fees, buy the whole market and re balance on a regular basis. not a big fan of fees or making someone else wealthy with my hard earn dollars.

    • Lyle says:

      Or read anything by Bogle, who founded Vanguard and the index fund idea.

    • rd says:

      Unfortunately, many 401ks don’t offer those options.

      • bear_in_mind says:

        That’s exactly right! The 401(k) and 457(k) companies package the funds they want to sell you at the prices they want charge.

        You can choose to either: use pre-tax dollars and employer-match funds (where available) on the funds offered, or pound salt.

        Sure, you can open a Traditional IRA (w/ tax deduction) or Roth IRA (post-tax monies), but the amount of principal and tax-efficiency is nowhere near as advantageous as with 401(k) / 457(k) products.

        Yet again, the lack of consumer-oriented regulations allow financial firms to do what they will with their “customers.”

  14. 873450 says:

    U.S. style capitalism is different, indeed exceptional. Here, government is Wall Street’s nanny.

  15. farfetched says:

    We should let competition take care of the situation the same way it has for investment accounts and index funds. Employees should be able to choose their own 401K firm and direct their own investments. Right now we have employers working with investment firms with all kinds of unseen incentives, limited investment vehicles, insane transaction and “management” fees, and the opportunity for corruption and outright theft is immense. It’s no more difficult to direct 401K funds to employee chosen firms than it is for direct deposit paychecks. The only other choice is to make employers, advisers and managers fiduciaries and bind them legally. Most of these crooks would freak out if they actually had to manage FOR the employee instead of their own greed and fees, so let the employee decide.

    • We have had competition in this space since it launched in the early 1979s, and fees have gradually crept higher, not lower.

      It is in many ways a complex market failure

    • Berkeley Maven says:

      Farfetched, I’m even more idealistic. I don’t think that employers should be providing employee benefits in the modern era, when the average tenure at any given job is only a few years. Transition is messy, especially with insurance benefits.

      We started down this road when the government made health insurance deductible to employers yet tax-free to employees. Retirement benefits made sense when workers enjoyed long-term employment and defined benefit pension plans, and only employers could handle automatic contributions.

      When anyone can open an IRA at Vanguard at as low a cost as the cheapest 401k plans — why put employers in between? Answer: to have live humans motivate and automate contributions.

      Collapse all flavors of defined contribution plans into a new, standard SuperIRA. Maximum contribution of up to 100% of earned income, with a limit of $20K. Employers free to match up to another $10K. Employees free to choose providers; some government agency (E-Warren’s?) and independent non-profits (Consumers Union?) could come up with recommended lists of low-cost, high-quality firms. Employers automate contributions much like they offer direct deposit of net pay to employee’s checking accounts.

  16. Primetime says:

    BR,
    Rather than pay a government funded pension for x number of years once someone turns 65, would it not make more sense and be dramatically cheaper for the government to pay everyone born in a country say $3,000 per year for the first 6 years of their life and this along with compulsory 5% employee and employer contributions during their working career be to the way to go. That way you use the power of 65 years of compounding returns as suggested by Richard Russell. Surely such an approach would make government funded superannuation indefinitely affordable. Presumably the main reason such an approach is not adopted by any political party, is that it would take a lifetime for the policy to deliver tangible benefit to both the retiree and country?