The overall cost of investing is dropping which, according to most experts, should in turn should mean lower investment fees for defined contribution (DC) plans like 401ks and 403bs. But the opposite is actually true due to increased revenue sharing fees embedded in the investments.
With more knowledge and awareness by employers sponsoring a DC plan along with 2012 DOL disclosure rules like 408b2 and 404a5 and a rash of fee related lawsuits and settlements, it seems that plan expenses are dropping, which is true if you look purely at investment related expenses. 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 when you look a bit closer at revenue sharing, the picture is quite different. Much of the decreases in fees is a result of the shift to index funds and ETFs where investment costs are much lower than actively managed investments as well as a move to collective trusts. According to the 401k Book of Averages, expenses to run a plan imbedded within the fund’s expense ratio are rising which does not make sense given the greater use of technology, industry consolidation and efficiencies which should result in higher productivity and lower costs. 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%,
Participants are waking up and, according to a recent survey, want:
- Clear and understandable fees.
- Having their interests put first.
- Having things explained in understandable terms.
Though most participants in DC plans don’t know what they pay with many thinking they pay nothing, plan sponsors can also get fooled by lower expense funds that actually charge a higher revenue sharing fee to offset plan costs. The DOL provides a good summary of what plan sponsors should know about DC plan expenses. After all, if you don’t know what you’re paying, how can you tell if the fees are reasonable?
