Broker Check

Fees Versus Returns

| May 01, 2018
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HOW FEES AFFECT PARTICIPANTS’ RETURNS


A great deal has been written about fees in 401(k) plans. The
Department of Labor, along with the news media, have put the
spotlight on fees and expenses with something called 408(b)(2)
and 404(a)(5) fee disclosure requirements. Employees have won
multimillion-dollar lawsuits against large 401(k) plans that are
focused on fees and what are called revenue-sharing arrangements
by service providers of these retirement plans. (See Tussey v.
ABB—Fiduciary Matters Blog.)


408(B)(2) FEE DISCLOSURE
It is the responsibility of the plan sponsor fiduciaries to 1) receive
the full 408(b)(2) fee disclosure statements from their service
providers (each year) and 2) understand ALL of the fees that are
being charged to the plan and plan participants to make sure these
fees are “reasonable.”


Th e best way for the plan fiduciaries to know if their plan fees
are “reasonable” is to regularly review and benchmark the fees that
the retirement plan is paying.


However, when it comes to the actual plan investments, the
Department of Labor has made it clear that cheaper is not necessarily
better.


Let me give you a simple example. Which investment would
you prefer: a large-cap growth fund, whose money manager has
provided an average 6 percent annual return over the past 30
years, with a management fee of 0.50 percent (50 basis points),

or a similar large-cap growth fund whose manager has provided an 8
percent average annual return for the past 30 years but charges 1
percent (100 basis points)—in other words, twice what the other
one is charging? 


Most people would choose the manager with the lower fee,
because they are focused on the cost and not on the total average
annual return, the net of expenses. Instead, they should have
invested with the manager with the higher management fee. If
you look at the average annual return NET of fees, the manager
who charged 1 percent generated a higher return of almost 1.5
percent a year, or $262,831 more over 30 years.


The chart demonstrates the significant diff erence between these
two managers impact on a participant account balance over a long

period of time.

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