401(k) fees are once again in the spotlight, with Bloomberg Opinion publishing a piece that critiques their impact on retirement savings—or more precisely, the middlemen who, according to the article, complicate the system.
Titled “401(k) Fees Are Eating Your Retirement Savings,” the article is written by Ethan Schwartz, an investment manager and former Treasury official in the Clinton administration. Perhaps someone should introduce him to the principles of behavioral economics.
Blaming an “antiquated 401(k) system,” he claims fee hover (his words) in the “range of 0.5% annually.” Far from hovering, fees have fallen—fast—for some time, to the point where fee compression is a major issue for managers, advisors, and everyone else. Thankfully, it’s forcing them to develop new and creative products to serve clients better.
You’d think a former Treasury employee would understand that the 401(k) is a framework; how it’s filled is what matters. He would just as well blame a car for a reckless driver.
This one time, this one friend had overpriced active funds in an investment menu, which apparently triggered his tantrum. I’ll do him one better since anecdotes are evidence.
The 401(k) in which I invest consists of low-cost, passively managed index funds, with a menu that includes actively managed options for those who—especially in the current COVID crisis—might want to take advantage of the resulting volatility. It’s not my bag, but I’m glad I have the option.
The Investment Company Institute routinely reports on declining expense ratios and Morningstar’s David Blanchett recently researched the alpha advisors provide. While the latter noted the advisor’s impact drops as assets rise, smaller businesses benefit most; exactly the demographic one would want to receive help.
He would dismiss the source since he refers to counter arguments as industry “howls” rather than principled opposition.
“Their most likely argument will be that investment managers and trustees perform a useful function in providing optimal investment choices, while educating savers on how to select among them,” he writes, preemptively undercutting any attempts at rebuttal.
But it’s his casual contention that sponsors and participants would behave rationally and truly act in their own best interest, without professional guidance, at which we marvel most.
Dr. Kahneman, Dr. Thaler, time to return those prizes.
This last paragraph is quickly becoming cut-and-paste boilerplate. Most sponsors carefully and effectively construct their 401(k)s, and some do not, but his criticism comes as coverage is increasing, balances are rising, and yes—fees are falling. If he thinks “removing the middlemen” will somehow make it better, the only howls he’ll hear are pitying laughter.
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.
