On August 30, 2012 401k plan sponsors (companies, trustees) are required to disclose all plan expenses to plan participants. Expenses are a very big deal because every dollar of expense is one less dollar participants have available to reinvest for their retirements. It is in participants’ best interest to understand ALL of the expenses that are deducted from their accounts for three reasons:
1. Expenses may be excessive in relation to investment performance.
2. Expenses reduce participants’ net performance.
3. Participants may have to defer retirement dates due to high expenses and poor net performance.
Given the importance of accumulating assets for retirement, a high percentage of plan sponsor trustees have not taken their responsibilities seriously. They make token efforts at due diligence and generally give control of 401k plan assets to brand name mutual fund companies that may also provide plan administration. This makes their trustee role easy and who can criticize them for selecting a brand name company.
Fidelity’s Magellan fund illustrates the problem. It is a popular large capitalization stock choice in thousands of 401k plans. The fund currently manages more than $12 billion. It’s track record for the past 10 years was 3.4%. The S&P 500 returned 6.3% for the same time period. Yes, an S&P 500 index fund outperformed Fidelity’s Magellan fund by almost double. From an expense point of view, on its website, Fidelity says the expense ratio for Magellan is .55%. The fee for a corresponding S&P index fund could be as low as .10%. You are right again, plan participants could have doubled their performance and reduced their expense by 75% if trustees bothered to review the data and make decisions that benefitted plan participants. This is a breach of their fiduciary duties, but how many plan participants are going to sue their employers and key employees who are usually the trustees.
When participants have expense data, they also have to look at investment performance to determine how they are better off. For example, they may find their international stock fund has an expense ratio of 1.80% and they could have invested in an international index fund for one-tenth the expense. And, like the Magellan example, they could have achieved higher returns on their assets – in particular after all expenses are deducted.
No wonder a lot of apathetic trustees are covering their tracks before 8/30. For the first time, participants will be able to see how expenses are undermining the achievement of their goals for secure, comfortable retirements.