401k Plans Focus on Fees Losing Sight of Value
At a TPSU program held at LaSalle University, Adjunct Lecturer Tim Dougherty describes the increased focus by 401k plan sponsors on fees and how he tries to keep the focus on value as well.
With the wave of lawsuits against 401k and 403b plans growing threatening to become a tsunami, as well as DOL fee disclosure regulations released in 2012, plan sponsors have been hyper focused on fees. The movement has led the growth of index or passive funds that tend to have lower fees than active investments.
But the siren call for plan sponsors to all index funds can be dangerous. In a raging bull market which we have enjoyed over the past eight years, index funds perform well. But when the market turns, many plan sponsors that do not have some exposure to high quality active investments in select asset categories will suffer unnecessarily. And while the demographics of employees from some companies will indicate the need for more index investments, it’s not the case for all organizations.
The race to the bottom for record keeper fees which has dropped by almost 50% over the past decade and is driving venture capital investments in 401k robo record keepers is also alarming. Many companies, especially smaller ones, need more live help than low-cost, high-tech providers can offer. And some record keepers with excess capacity may be willing to offer attractive pricing that is not sustainable resulting in poor service or further consolidation.
Plan sponsors must weigh the needs of the company and their employees when selecting providers, advisors and funds. And while it is prudent and required to make sure that fees are reasonable, without determining the value received the exercise is not complete. The law does not require plan sponsors to have the cheapest plan or the lowest cost investments.
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