Disclosure not the Only Issue with 401(k) Plan
Fees
February 3, 2009 (PLANSPONSOR.com) - While clear and
complete disclosure of fees and costs can help 401(k) plan
sponsors ensure that plan fees are not unreasonable for
participants, disclosure alone is not sufficient.
So assert researchers for the Center for Retirement
Research at Boston College in a new Issue in Brief. The
researchers conclude that the structure of fees commonly
used in 401(k) plans tends to transfer wealth among
participants and can reduce the returns that participants
earn on their savings.
In reviewing the structure of 401(k) plans, the
researchers found that most plans charge participants a
fee that is expressed as a percent of their
assets.
Although this expense ratio often varies by type of
asset, reflecting differences in the cost of managing the
funds, it is otherwise constant, according to the report.
The researchers say charging fees in this way does not
allow participants to weigh the benefits against the
actual costs of their plans' services.
In addition, the constant expense ratio transfers
retirement wealth from accounts with higher balances to
those with lower balances. The researchers point out
that, other things equal, the fees collected from
participants tend to be a constant proportion of the
balances they hold in the plan, but some of the costs
covered by these fees - administrative and sales costs,
for example - are relatively constant for all
participants, regardless of the size of their
balances.
Participants with twice the balances of others do
not necessarily incur twice the management cost, but they
pay twice the management fee, which reduces the return
credited to higher balance accounts and boosts that on
lower balance accounts.