“Fee disclosure has had an effect. The amount of requests for proposals has increased. Plan sponsors are getting bids to compare offers and plan fees.”
That’s what Joe Valletta, co-publisher of The 401(k) Averages Book, told me in a recent interview.
If this seems obscure to you, let me assure you that it isn’t. This is the Year of Full Disclosure for 401(k) plans, the first time that plan providers must disclose all their fees, charges and revenue-sharing arrangements to comply with new Department of Labor standards. The new statements are just now going out to plan participants.
Some plan sponsors will be shocked. Their employees may be even more disturbed when they learn that 2 percent or more can be coming out of their plan assets every year. While 401(k) plans that have lowered costs have received a lot of news media attention in recent years, they were mostly plans offered by large employers such as Exxon Mobil Corp. and Texas Instruments Inc. In 2009, for instance, Business Week lauded IBM for “reinventing” the 401(k) plan.
What did reinvention mean? Cutting fees to about 10 basis points — one-tenth of 1 percent — largely by shifting from managed mutual funds to low-cost index funds. As I have pointed out in many columns, cutting plan costs can be as important as having a hefty employer match.
Cutting plan costs can also mean having a much larger retirement nest egg. Here’s an example. Suppose twins Joe and John choose identical careers with salaries of $50,000 at age 30. Both save 10 percent of their income, and both receive raises of 3 percent a year. Suppose both target retiring at age 65 and have plans that have identical returns of 7 percent before fees. The only difference is that one plan has expenses of 1.5 percent, while the other has expenses of 0.5 percent. How big a difference will costs make?
The twin in the high-cost plan will accumulate 6.59 years of final income, while the twin with the lower-cost plan will accumulate 8.85 years of income, a difference of 34 percent. Reduce the cost to 0.10 percent, and the amount accumulated will rise to 9.6 years of final income.
To read the rest of this article click here.