Call it the law of diminishing returns. A hyper-focus on low fees to the exclusion of other important factors could harm, not help, 401(k) plan participants prepare for retirement.
A recent article in the Journal of Financial Planning by Northern Trust senior vice president Gaobo Pang argues that “Selecting or dismissing investment strategies based on fees in isolation, absent a holistic view, is likely a biased effort in helping workers prepare for retirement.”
“Lower fees are beneficial to plan participants, other things being equal,” Pang writes. “Fiduciaries are obligated to assess and negotiate fees. Yet, racing to the bottom of fees may detract fiduciary oversight of investment selections. A lower-cost mandate tends to entail easier-to-implement asset classes with less professional expertise and services necessary, and thus may forgo return opportunities if such route has insufficient exposures and diversifications among key areas and markets.”
The piece rightly notes that “DC-type plans have become the dominant platform in the U.S. retirement landscape. 401(k)s, 403(b)s, IRAs, and the like held $14.2 trillion assets at year-end 2014, far exceeding the assets of any other types of plans.”
It concludes that, “Sponsors may wish to zoom out at some point and defy the behavioral ‘familiarity bias’ with fee bargaining, stress the fundamental role of savings to participants, and ensure uncompromised integrity in investment philosophy, portfolio construction, and execution. A holistic approach is likely the best way for sponsors to achieve their ultimate goal: helping their employees financially prepare for retirement and have an orderly workforce exit.”