Who doesn’t love a surprise? Surprise party, surprise gift, surprise trip …. But when it comes to your client’s 401(k) plan, it’s more like surprise colonoscopy. Mutual fund giant MFS released a white paper, “The Hidden Cost of Surprises,” which looks at the costs not readily identifiable to participants, advisors and sponsors.
“To improve the retirement outcomes of their plan participants, defined contribution (DC) plan sponsors face a delicate balancing act—offering investment strategies that fuel asset accumulation while minimizing the costs that slow growth,” the authors explain. “Performance and peer rankings provide some clarity on the accumulation potential of a DC portfolio, but understanding the costs isn’t always as intuitive.”
Unlike explicit, hard dollar costs that are easy to identify, they add, there are other costs, often arising from how a portfolio is managed, that lurk within DC portfolios.
“These hidden costs may come as a surprise to plan sponsors. Worse still, they can be a significant deterrent to successful retirement outcomes. By recognizing and controlling hidden costs, plan sponsors can help participants build assets for the long run.”
What are some of the “hidden surprises” and related costs that can jeopardize successful retirement outcomes?
MFS wisely notes that a full treatment of all the potential risks that investors face would make for a very long book. However, they consider he cost of volatility, illiquidity and short-term thinking, along with looking at the cost of risk in different types of portfolios, whether equity or fixed income.
“Target date portfolios, which allocate assets to underlying equity and fixed income portfolios, face the same issues and risks due to the exposure of the underlying portfolios.”
Raising the age-old and ongoing active vs. passive, MFS concludes by arguing that “active management offers the opportunity to position away from higher-risk segments of the market, and the opportunity to evaluate volatility and liquidity concerns as part of an investment decision.
“In helping their participants prepare for potentially difficult markets, plan sponsors also help the bottom line of their own companies,” the authors write. “Employees who don’t have enough assets to retire skew the demographics of the workforce, slowing the hiring and advancement of younger workers and driving health care costs higher.”
With more than 20 years serving financial markets, John Sullivan is the former editor-in-chief of Investment Advisor magazine and retirement editor of ThinkAdvisor.com. Sullivan is also the former editor of Boomer Market Advisor and Bank Advisor magazines, and has a background in the insurance and investment industries in addition to his journalism roots.
