An Aon Hewitt survey found that more than 75% of employers had attempted to cut 401(k) expenses in the past two years. We spoke to Rob Austin, director of retirement research at human resources consultant Aon Hewitt, to find out more about this trend and others affecting 401(k) accounts.
KIPLINGER: What’s behind the fee-trimming trend?
AUSTIN: The Department of Labor’s fee disclosure requirement shone a spotlight on fees for a lot of employers, and it has made more people aware of what they’re paying for. A second motivation is employers’ legal obligation to act in their employees’ best interest, known as their fiduciary duty. Employers want to make sure they provide the best investments at the best price.
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The survey also found a big increase in the number of plans that offer “institutional class” funds. Why?
Employers can use their purchasing power to invest in funds used by professionals that are not broadly available to individual investors outside of 401(k) plans. Ultimately, the funds can provide better returns and lower fees.
More companies are charging a record-keeping fee instead of a fee based on a percentage of assets. How does that benefit employees?
When employees are charged a flat rate of $50 a year, a typical participant with a starting salary of $75,000 ends up with $200,000 more in retirement than he or she would have had if a yearly fee of as little as 0.25% of assets were imposed. A flat fee is a little more equitable, too. Whether a person has a balance of $100 or $100,000, he or she has access to the same technology, the same phone lines. Why should the employee who has more money pay more for those tools and resources?
Are employees who leave their jobs better off keeping their money in their former employer’s 401(k), rather than rolling it into an IRA?
That can be a good idea for a number of reasons. You have investment products that have lower fees. You also have the power of fiduciary responsibility through an employer plan that you wouldn’t have in a typical retail IRA. In an employer plan, there are people who have to monitor these funds to make sure that fees are competitive and returns are good.
What should employees do if they’re dissatisfied with their 401(k)?
Do a little legwork to make sure your employer is choosing the right funds. Plan administrators who are doing the right thing and have documented why they’re choosing the funds on their menu have no reason to fear. But if they can’t say for sure why they’ve chosen particular funds, then that makes for a difficult conversation.
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