A white paper, “The Retirement Savings Drain: Hidden & Excessive Costs of 401(k)s” recently released by the liberal think tank Demos is claiming that fees in 401(k) plans are “hidden and excessive.” Although the paper’s findings certainly sound sensational, the reality is much different.
The Expense Ratios for Index Funds Are Typically Significantly Lower than the 95 Basis Points Stated in the White Paper. In determining the amount of fees paid by a hypothetical 401(k) plan participant, the white paper set “the stock index fund’s expense ratio at 0.95 percent.” Rather than using expense ratios for index funds, the white paper used the year-end weighted average of the expense ratios and annualized loads for individual funds for 2010. If they had used the expense ratios for common index funds, their calculations would have resulted is significantly lower fees.
The Assumption That Trading Fees Are Equal to the Expense Ratio Has No Basis in Reality. Rather than perform any analysis of the average trading costs, the white paper simply assumes that “trading fees are likely equally costly, meaning that its total, true fee burden is double the expense ratio…” However, this assumption has no basis in reality. Trading costs vary significantly based on the frequency with which the underlying investments are traded. As a result, the white paper’s calculations are not based on accurate data.
The Federal Government Has Finalized Guidance That Requires Plans and Participants to Receive Information about Their 401(k) Plan Fees. Beginning July 1, all retirement plan service providers will be required by the U.S. Department of Labor (DOL) to disclose all plan fees and services. Additionally, participants will begin receiving disclosures about the fees charged to their accounts in the upcoming months. This increased fee transparency will generate even more competition among financial services companies —a definite benefit for 401(k) plan participants.
401(k) Plans Provide American Workers With an Important Method of Saving for Retirement. The white paper argues that the 401(k) plan needs to be replaced. However, 401(k) plans have enabled countless workers to have adequate retirement savings. The EBRI/ICI 401(k) Accumulation Projection Model found that 401(k) plans enabled workers to be substantially more prepared for retirement. For example, workers in the lowest income quartile had an income replacement rate of over 106 with their 401(k) balances, but only had an income replacement rate of less than 52 without a 401(k) balance.
American Workers Shouldn’t Replace 401(k) Plans With a Government-Run Plan. The white paper suggests that participants would be better off in a government-run account. However, there are many reasonably priced 401(k) plan investments available right now, and competition and increased transparency will continue to improve the value of these investments. Additionally, proponents of government-run plans have unrealistic expectations about the efficiencies that would be achieved with government-run programs.
ASPPA has been a champion of fee disclosure and transparency for years. We believe that participants deserve to know the fees associated with their plan so they can choose options that are best for them. As Brian H. Graff, CEO and Executive Director of The American Society of Pension Professionals & Actuaries (ASPPA) notes “The only thing proven by this white paper is that if you use ridiculous and biased assumptions you can reach ridiculous and biased conclusions.”
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