Changes Occurring in the 401(k) Market

Both investment and administrative fees have been decreasing, especially for larger plans

Two recent articles in the Wall Street Journal from 5/16 and 5/21/16 illustrate the changes that have been occurring in the 401(k) industry in response to regulatory changes and the proliferation of lawsuits. To review, the Department of Labor recently issued a ruling (to take effect next year) that providers of investment advice to retirement plans and accounts must adhere to a fiduciary standard rather than a suitability standard. In 2012, the DOL issued a rule requiring full disclosure of all plan-related expenses to plan participants. Both of these rules come on the heels of a string of lawsuits filed against companies for incurring unnecessary expenses (borne by plan participants) in their retirement plans. The suits filed by one firm alone (Schlichter Bogard & Denton LLP of St. Louis) have achieved settlements totaling almost $300 million. The Supreme Court itself weighed in with a decision last year that companies have a continuing fiduciary duty to utilize the lowest cost fund classes available to their plans.

The first article (“Fees on 401(k)s Head Lower”) notes a trend towards lower fees that has brought the average annual fund fee (for stock mutual funds) paid by plan participants from 0.74% in 2009 to 0.54% in 2014, according to the Investment Company Institute. Similar decreases have occurred for balanced funds and bond funds. Given the $4.5 trillion size of the 401(k) market, each basis point (one-hundredth of one percent) reduction equates to $450 million of savings.

One example given is Chobani (the yogurt company) which reduced its annual plan expenses from about 1.5% of assets in 2013 to about 0.50% in 2014 as it switched over to index funds. This is but one example of a very large trend that has been upending the investment management industry. The article notes that while large companies have been most aggressive in cutting costs, the new DOL rule is likely to put similar pressure on fees in small-company plans.

Investment-related fees comprise the overwhelming majority of the expenses paid by plan participants with the remainder made up of administrative fees—which cover expenses associated with services such as recordkeeping, call centers and mailings to participants. These fees have also been steadily decreasing, according to the second article (“401(k)s Tweak Fee Charges”). In 2015, median administrative fees hit an all-time low of $64 per participant, down from $70 in 2014 and $118 in 2006, according to investment consulting firm NEPC LLC. It is important to note that 401(k) administrative costs are often buried in mutual fund fees via revenue-sharing arrangements. In recent years, however, more mainly large and midsize plans have moved away from revenue-sharing to impose separate, explicit administrative fees. At Clarity, we expect this trend to gain traction with smaller plans as well, and are more than ready for it with our flat-fee per-participant pricing structure and our exclusive use of low-cost funds with no revenue-sharing.