401k Fees Continue to draw attention.
The hodge podge of fees layered onto investments with retirement plans like 401ks and 401bs is getting the attention of the SEC’s Investor Advocate in a recent report. Citing a recent Morningstar analysis of mutual fees which has shown significant declines, Fleming is concerned that additional advisory fees by platforms and advisors will mute the benefits of declining expense ratios within the $16 trillion mutual fund industry.
According to Morningstar, overall mutual fund expenses dropped by 16% from 2009 to 2015. In fact, 63% of fund share classes and ETFs (exchange traded funds) reduced their expense ratio, with 24% decreasing fees by over 10% and 21% increasing fees. Revenue reached an all-time according to Morningstar increasing 66% from 2004-2014 though assets increased 143% and the average weighted expense ratio declined 27%. Even the WSJ citing experts pointing to market pressure, lawsuits and more DOL rules are predicting lower fees for DC plans.
But many of these lower priced index funds and ETFs (exchange traded funds) which are growing in popularity in defined contribution (DC) plans are available through advice platforms that layer on additional fees. In addition, while expense ratios of a $2 million and $10 million plan dropped .04% according to the 401k Book of Averages as of September 30, 2015, revenue sharing increased .03% for both segments and record keeping increased for smaller plans by .02%, negating most or all of the cost savings.
Though fee based advisors in DC plans are growing which will only increase with the new DOL conflict of interest rule set to become effective April 2017, Fleming is concerned that additional fees from advisory platforms could hurt retirement investors.
Moving away from revenue sharing and making fees more transparent will only help highlight the costs as well as value supplied by providers and advisors in DC plans as the the growing use of institutionally priced and index funds helps lower overall fees.
