Costs of 401(k) administration, advice and investments continue to go down as more companies offer index and target date funds according to a joint study by the Investment Company Institute (ICI) and Brightscope.
Specifically, from 2009-2013, overall plan expenses have dropped from 1.09% to .89%; participant costs lowered from .65% to .58%; investment costs went down from .47% to .42%.
Fees have become a big focus for plan sponsors and their participants with recent lawsuits, new DOL fee disclosure regulations (408(b)(12) was promulgated in 2012) and press coverage. Employers sponsoring a defined contribution (DC) plan like 401(k)s are not obligated to have the lowest fees but their fiduciary duty is to make sure fees are reasonable. Fees in the absence of value will always seem high so benchmarking is an essential part of the process.
Index funds have contributed to lower fees with 90% of plan offering them in 2013 with more than 25% their assets invested compared to 79% of plans in 2006 with just 17% of assets indexed. TDFs have come very popular since the 2006 Pension Protection Act was passed growing from 32% of plan offering them to 73% in 2013. Participants in larger plans, which comprise a big percentage of the pool, enjoy better pricing because of economies of scale and more sophisticated buyers.
Smaller plans should take heed and consider offering lower cost options like index funds to their employees as well as also taking advantage of greater buying power that individual investors might not enjoy. As money moves from DB (defined benefit) to DC plans to IRAs, there is greater scrutiny over the investments which is why regulators and lawmakers are starting to pay so much attention to IRAs and why more employees are interested in rolling money into their DC plan from IRAs and keeping their money in their employer’s plan when they retire.
