More Index Funds (ETFs) Sought for 401(k)s
The Wall Street Journal wrote a story this morning highlighting the appetite for 401K participants, and providers, for low cost index funds (ETFs). Poor recent performance by active stock-pickers has forced employers to ask what value their workers are getting from these higher-priced mutual funds.
The Wall Street Journal Reports, “In a spate of recent lawsuits, workers have claimed their 401(k) plans charged excessive fees and offered actively managed funds that failed to beat cheaper index-tracking alternatives. And a bill working its way through Congress would require clear disclosure of 401(k) fees and effectively mandate that plans offer at least one index fund.
But even including nonmutual-fund 401(k) investment options, such as collective investment funds, growth of indexing strategies in the plans has been relatively modest. Further, total indexed 401(k) assets declined substantially last year as workers fled to stable-value and money-market funds, retirement experts say.
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A longer-term factor slowing 401(k) acceptance of index funds is “revenue sharing,” experts say. In revenue-sharing arrangements, plan administrative costs are often built into the expenses of funds offered in the plan.
To avoid breaking out these administrative fees separately, which might prompt employers to more closely examine plan costs, plan advisers tend to promote the use of funds — often actively managed — that have plenty of revenue sharing to cover all these costs, critics say.
“Obscurity allows fees to stay higher for longer,” says Ryan Alfred, the president of 401(k) data and analytics firm Brightscope.
Many retirement-plan experts are hoping the 401(k) fee disclosure bill recently approved by the House Education and Labor Committee will help remedy that. The bill would require plan fees to be broken out into separate categories for administrative, investment management, transaction and other expenses.
With such fee disclosure, employers and employees may well discover that index funds will deliver better returns at a lower cost, says the committee’s chairman, Rep. George Miller, a California Democrat. As workers struggle to save, their nest eggs “should not just be the happy hunting grounds for fees and commissions,” he says.”
For the whole story click: HERE
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