Investment Firm Provides Opinion on 401(k) Fee Disclosure

[Dave Baker]

An investment management firm has published a detailed 'fact check' of Tuesday's testimony to the House committee looking into disclosure to participants of fees charged on investments of 401(k) (basically, self-directed defined contribution) plans. Here's the text of the description and the hypertext link, from today's Benefits in the News page here on BenefitsLink.com:

Opinion: 'Fact Check' Needed for Testimony Given to House Committee on 401(k) Fee Disclosure (PDF)

11 pages. Mr. Eisen provides comments on each key point presented by four witnesses at the March 6, 2007 hearing, and explains why he agrees or disagrees with each point. (Ron Eisen of Investment Management Consultants, Inc.)

Comments?

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[Guest assaley AFS Financial]

I am extremely refreshed to see this "fact check" testimony come out. I was overall appreciative of the hearing but felt in some cases witness were stating their personal preferences to what a 401(k) should be like, rather than address the true issue. As a 401k advisor and strong advocate of full and open disclosure it was interesting to watch this hearing. I strongly sided against Hutchinson - who quite honestly wanted to remove a lot of the infrastructure and basis that a 401k was built on. While I could reach agreement on some of the statement from all participants - I also had knowledge that each participnat was making statements that warranted some sort of "fact checking". Still I applaud all witnesses and the House committee on labor and education for taking the step to continually improve our country's retirement system. My only hope is that they stick to the often repeated statement from the hearing and don't make the issue more complex and more costly by attempting to oversimplify, as the gov't sometimes does.

[TLGeer]

An investment management firm has published a detailed 'fact check' of Tuesday's testimony to the House committee looking into disclosure to participants of fees charged on investments of 401(k) (basically, self-directed defined contribution) plans. Here's the text of the description and the hypertext link, from today's Benefits in the News page here on BenefitsLink.com:

Opinion: 'Fact Check' Needed for Testimony Given to House Committee on 401(k) Fee Disclosure (PDF)

11 pages. Mr. Eisen provides comments on each key point presented by four witnesses at the March 6, 2007 hearing, and explains why he agrees or disagrees with each point. (Ron Eisen of Investment Management Consultants, Inc.)

Comments?

Note to new users of the message boards: everybody can view this discussion, but if you'd like to post a comment (called a "reply") -- and please do! -- you'll need to register (free, fast): click here to register.

The hearings did not even address the real starting point-what does it cost to run a retirement plan? People associated with retirement plans operations have to get that plus a profit margin. Fees cannot be reduced below some minimum level based on the complexity of the regulatory scheme.

Given that, the question then is whether totals are reasonable. This is, and ought to remain, a function of the marketplace. Given a competitive and reasonably efficient market (present for 401(k) but not 403(b) or 457(b)), this will drive high cost providers out of the market.

The back-room money, therefore, is not good or bad. The question is how it ought to be disclosed. The answer is "fully and comprehensibly".

Tom Geer

[401(k)guru]

I was happy to see the fact checking summary because I was surprised at some of the statistics that were tossed around.

On another note, one of my pet peeves is trying to analyze the “true cost” in bundled arrangements which utilize “retail” mutual funds in a defined contribution plan. With all of the ERISA requirements for the types of investments in which qualified plans are permitted to invest, why shouldn’t there be a new type of mutual fund class of shares offered which is geared to only defined contribution plans? Only with this new class of shares do I feel that I will be truly able analyze the investment costs and administrative costs accurately.

[Guest jims]

I didn't see the entire testimony - but am glad to see the fact check. Thanks to Dave and the author for the quick response. In any facts, using averages can be very misleading. The debate and testimony have a long way to go - and I hope they follow Rep. McKeon's desire to go slowly. While its possible to make many sweeping comments about 401(k) plans, its difficult to make comments that apply to all 401(k) plans. There really are many different types of plans that are trying to deliver different levels of service. There are good providers and not so good providers along with knowledgable plan sponsors and not so knowledgable plan sponsors. At there will always be sharks. Its a good thing the testimony didn't include 403(b) plans - if it did, every 401(k) plan would look like a angel and the greatest gift ever.

[Locust]

I agree that some of the Mr. Hutcheson's numbers for costs seemed exaggerated, but in the current state of disclosure, who knows?

I appreciate Mr. Hutcheson's focusing on participants and on changes that could improve the retirement for most participants. The system we have now is not the best one for participants. He was the only who asked the bigger question: how do you construct a system that will help the most participants get the greatest level of retirement? He had his view, which is that you simplify and disclose and concentrate on index funds and low fees.

Mr. Chambers pooh-poohed that with statements like, "our law firm's funds have done significantly better than their comparative indexes," and some plans want lots of bells and whistles. He doesn't address the same issues as Mr. Hutcheson. The fact is that most participants have no idea what to do with all the bells and whistles and don't untilize them.

Why is there such a problem with disclosure? Everyone agreed it was needed, and at least one Congressman made the point that fees should be a basis for competition. The reason, I believe, is that disclosure will result in a reduction of fees for investment advisors, and that would be a result the advisors, who control most plans, want to avoid.

As the system currently operates, the investment advisor is the primary advisor for most plans, and the investment advisor chooses the recordkeeper and other service providers and decides who gets paid what. As the investment advisor has to in a sense pay for the various services out of its gross fees, it knows how much each service is costing. The issue for the investment advisor isn't the administrative cost of reporting what the service providers are getting, but rather that if we know what the service providers are getting we can also determine what the investment advisor is getting.

The 401(k) industry is structured like the insurance industry. The investment advisor is like the insurance agent. The insurance industry has found that the way to motivate their sales force to sell insurance to individuals and small companiesis is to offer higher commissions.

[Guest S.J. (RIA)]

A couple things that all of us might consider. First, the "fact check" only dealt with matters of fund fees, and from my experience, broad averages of mutual funds. The hearing was about "plan costs" which includes fund expenses and other expenses as well. Also, what about smaller plans that have retail funds, or variable annuity contracts, of "funds-of-funds?" I think over one third of all 401(k) plans, meaning over two hundred thousand fall into the retail/VA/wrap/fund-of-fund scenario. These smaller plans cost more. There's much more that I've learned, and I can say with some level of confidence that the author of the "fact check" is either biased and has some bone to pick, is ignorant, is naive, or a combination of the three.

After seeing yesterday's Wall Street Journal, I'm more certain than ever that Hutcheson has some interesting insights into this topic that we should respect. There's a reason Congress asked him to testify, and we should seek to understand more of what he does.

Yesterday's WSJ made me ill, and very angry, and unfortunately validates Hutcheson's testimony in a big way. It reveals one UBS fund charges 12.11% alone, and has been hiding 9.47% of it, but now has to disclose the TRUE cost due to a new SEC rule.

See Wallet Watch: Look Again at Fund Fees By DIYA GULLAPALLI, June 16, 2007; Page B1.

"Another fund, UBS Multi-Strat Fund, showed a 12.11% total annual expense last year, compared with about 2% for the prior year, thanks mostly to 9.47% in AFFE. The fund hasn't actually upped its fees, but simply looks pricier because it must disclose more information. The filings for this fund, which is a 'closed end' fund, also note the figure could change based on performance of the underlying managers."

"The change has been more of a headache for smaller fund firms. The roughly $40 million Teberg Fund expects its expense ratio to go up more than 0.75 percentage point to about 3.25% when it files its prospectus this year."

Are these figures exaggerated?

S.J.