Portfolio-stress test firm RiXtrema took an exhaustive look at over 52,000 defined contribution plans.
The results?
Plan participants could save on average .25 percent per year (25 basis points) by switching to lower cost investments that are quantitatively very similar to those they already hold, but with a better track record.
With total defined contribution plan assets of $6.8 trillion (using a figure from March 2015, when the analysis began), it claims the potential savings is at least $17 billion.
RiXtrema’s research objective was to find low fee replacements for high fee funds, but only where it could be proven that:
- the replacement does not materially change the risk/return profile offered to participants in their current menu, and
- that the track record of that fund is actually better on a ten-year basis, than the track record of the incumbent fund.
“It has been widely argued that 401k and other retirement plan participants are poorly served by plan menus comprising expensive mutual funds that tend to underperform over time due to higher fees and lack of consistent alpha,” the company said in a statement. “Until now, there has been surprisingly little quantitative evidence regarding fee inefficiency and waste in retirement plans.”
It refers to Department of Labor analysis, which used an average of 11.3 basis points as an estimate of waste in 401k plans.
However, an independent study indicated that menu restrictions in an average plan led to 78 basis points of additional cost relative to a low index fund basket, but that study “could be challenged based on the argument that high fee funds held by participants should not be directly compared to low cost funds due to the unique return and correlation profile.”
RiXtrema’s analysis went beyond fees, also focusing on quality measures to ensure that fee savings would not come at the expense of performance for participants.
“We have been researching the defined contribution plan market for more than two years and have been surprised to find that even many of the largest plans do not use the available leverage to obtain the best deal for plan participants,” added RiXtrema President Daniel Satchkov. “In today’s debate about the future of fiduciary advice, it is critical to consider evidence-based approaches, which is what we have provided in this most extensive study ever undertaken.”
RiXtrema analyzed 52,529 retirement plans from the Department of Labor EFAST database. EFAST is an all-electronic processing system of Forms 5500 and 5500-SF which are filed each year by pension and welfare benefit plans to satisfy annual reporting requirements under the Employee Retirement Income Security Act (ERISA) and the Internal Revenue Code.