It Could Be Money in Your Pocket
Well over a year ago I wrote about the impact of fees in accumulating assets in retirement plans.in , It’s the Fees Stupid. Every 12 months is not too frequent to remind ourselves of this critical point.
In today’s NY Times, Ron Leiber sets forth a compelling analysis of the impact of fees on retirement savings in a 401(k) accounts. Leiber also reveals a sophisticated understanding of the business of providing and pricing 401(k) services. Revealing Excessive 401(k) Fees.
With the advent of 401(k) plans, mutual fund houses like Fidelity (mentioned in the Leiber article) launched turn-key products for plan sponsors. Known in the industry as “bundled services”, a plan sponsor could turn to a single firm for a complete $401(k) program — all in one, they would receive recordkeeping, administrative, investment and sometimes even shareholder support services.
The mutual fund houses, had one goal in mind: get their mutual funds on the platform of investment options for plan participants.
This was a great business model, until the class action lawyers rounded up plaintiffs to challenge these arrangements. Numerous cases have been filed around the country, and Leiber focuses on the Fidelity case. While the allegations are complex and nuanced according to the facts of each case, the basic claim is that the fee structures for these products were excessive and unreasonable. Part of arguments also include allegations that the fees structures are opaque and not fully disclosed, therefore no fiduciary or plan participant could make an assessment of the reasonableness of a fee. If a fee is not properly disclosed, it can be assessed for reasonableness.
As Leiber notes, these cases have been winding their way through the court system and it is taking a long time for the issues to be resolved. No doubt, if the initial proceedings do not go well for the mutual fund houses, the settlements with the insurance companies will be significant.
Theses cases caught the attention of the Department of Labor, and as Leiber noted, the Department has issued new regulators requiring fee disclosures. However, disclosing the fees is only the first step. Fiduciaries must understand the various fees and understand the price competitiveness of the fees. Expert independent fiduciaries could extract significant savings on behalf of plan participants.
Why does all this matter?
Leiber puts in very real terms, “just a quarter of a percentage point in annual savings now can mean tens of thousands of dollars more come retirement time.” Why should this money end up in the pocket of mutual fund execs or sales people. Instead, it come be “between vacation each year or two at age 75, or one plan ticket, or serveral, for the grand children to come see you annually.”
The mutual fund execs and the investment managers are likely flying around in their private planes. Better that retirees get to spend time with their families.
Fees matter. Fees add up over time.
Prediction: Future ligitation will focus on another mutual fund industry product: target date funds. More on that in another Post.