There has been a firestorm of attention on fees related to investing and administering 401(k) retirement plans. When the new 401 (k) retirement plan fee disclosure regulations came out in 2012, they were immediately misinterpreted by employers, creating what prominent ERISA attorney Fred Reish called “a race to the bottom.1” The old adage holds true, you get what you pay for. Yes, fee disclosures and transparency in the financial industry are a good thing. However, we believe it is short-sighted to force costs down at the expense of more education and better administration for plan participants.
In an interview with Fiduciary News, Phyllis Borzi, Assistant Secretary of Labor for The Employee Benefits Security Administration is quoted as saying “the point of the regulation is to give plan fiduciaries the information needed to make prudent decisions. Fees are obviously important, but fiduciaries also need to consider cost in relation to performance, the services they are obtaining as well as the quality of those services.”2 We agree.
The Focus on Fees
Focusing on cost has been an easy target for many critics because it is tangible and quantifiable. However, we would argue that fees are only one quarter of the overall equation plan sponsors need to consider when shopping their 401(k). Plan sponsors should focus on the overall health of the retirement plan instead of focusing on costs in a vacuum. All qualified plans are really made up of four components; plan design, investment choices (of which costs are a part), employee education and administration. All four components must operate in concert together in order to have a 401(k) plan that is meeting the retirement needs of the employee. The lowest cost investment lineup doesn’t do employees any good if they aren’t saving enough or don’t understand how to properly allocate the funds they do save.
According to the Investment Company Institute, the average 401(k) account balance was just $60,000 at the end of 20103. Those low balances are not necessarily a function of fees eating up returns but rather an exposé on one of the largest crises facing Americans – their lack of adequate savings.
Why aren’t people saving more for their own retirement?
The fact is most Americans have never been educated on what it will cost to retire nor how much they need to save to get them to a retirement status they’ll be able to enjoy without worrying about their financial needs. The emergence of 401(k) plans in 1978 gave employees the ability to direct the investments within their retirement plans, shifting that responsibility from employer managed defined benefit pension plans to employee defined contribution plans. We believe this is a responsibility that most Americans were not prepared to take on then and one for which most Americans continue to be ill-prepared.
If we agree that the low saving rates for 401(k) plans is a function of education, then shouldn’t we be more focused on educating employees than the “race to the bottom?”
The Real Focus – Plan Health
Plan sponsors should focus on the overall health of their retirement plan. By doing this, they will be better able to assess their plan investments, education, plan design and administration. Then they can decide if the fees they are paying are reasonable, if the service providers are adding value, and – most importantly – preparing their employees for retirement.
How do you know if you have a healthy plan?
Several benchmarking tools are available to plan sponsors that will compare plan design, savings rates, and investments to national averages. These tools show how your plan currently stacks up against other similar plans. You can also hire an advisor that specializes in benchmarking your plan investments, fiduciary procedures and employee outcomes. If you are looking to hire an advisor to benchmark your plan, make sure he or she specializes in the retirement business and can provide you solid references regarding his or her current and past work.
When hiring an advisor to assist in this benchmarking process, check to see if he or she has earned the Accredited Investment Fiduciary (AIF®) or Accredited Investment Fiduciary Analyst (AIFA®) designation. Accredited Investment Fiduciary Analyst™ designees are a select group of specialists with knowledge of both prudent investment processes and assessment principles – qualifications that are becoming increasingly important to both the industry and regulators.
Concerned About Your Plan?
If you are concerned about your plan or think you would like to access the overall health of your plan, here are a few questions to ask yourself to get started.
- Does your plan have an Investment Policy Statement?
- When was the last time you benchmarked your investments’ performance and fees?
- Is your current advisor or broker a plan fiduciary?
- Do you have a formal education process for your employees? If so, has it been successful in improving the saving behaviors in your plan?
- Is your current plan design providing you the most efficient and cost effective retirement benefit to your employees?
- Is your plan in compliance with the latest ERISA regulations?
- Is your plan administrator who files your Form 5500 reducing his or her billed fees by any investment revenue he or she may be receiving?
If you are unsure of the answers to any of these questions, it may be time to consult with an advisor who can better assess the health of your retirement plan.
Fragasso Financial Advisors can provide you with an array of tools, from a very basic benchmarking study to a full plan consulting engagement. If you are interested in seeing how your plan stacks up, please contact us for a free, no-obligation benchmarking study of your plan.