Data and Research March 15, 2021

Participants Don’t Know Their Fees Are Declining

A survey finds nearly three-quarters of Americans don’t know how much they pay in retirement plan fees, while the ‘401k Averages Book’ shows fees continue to come down.

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Nearly three-quarters of Americans surveyed do not know how much they pay in fees for their retirement accounts, according to a survey commissioned by investment management firm Rebalance.

More than half of survey respondents (57%) indicated they believe that they pay either no fees, or very low fees, to maintain their retirement investment accounts. Nearly one-quarter said they don’t know how much they pay in fees. The survey covered more than 1,000 U.S. adults, age 45-75 and working full time.

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This is despite the fact that plan sponsors have been required to provide fee disclosures to participants since 2012. And it may partly explain why plan participants are drawn into excessive fee lawsuits against plan sponsors.

If defined contribution (DC) plan participants don’t know they pay fees or how much they pay, then they also don’t know that fees for their plans are likely going down. The newly released “401k Averages Book 21st Edition” reveals investment fees continue to decline. All scenarios saw a year-over-year decrease in total investment costs ranging between 0.02% and 0.04%, with the average representing a decrease of 0.03%. 

In addition, 401(k) total plan costs declined for plans of most sizes: 23 of 24 scenarios saw a decrease in total plan costs from last year, while the other one remained unchanged. And, while the data shows smaller plans pay higher fees than larger plans, the costs for smaller plans have still declined.

The average total plan cost for a small retirement plan (100 participants/$5 million assets) declined from 1.23% to 1.20% over the past year, while the average total plan cost for a large retirement plan (1,000 participants/$50 million assets) declined from 0.91% to 0.90%.

“Even as 401(k) fees continue to decline, the industry saw new fee litigation cases explode in 2020. This may be why many studies are showing a majority of employers are looking to review/benchmark their plan fees in 2021, while others are considering vehicles such as pooled employer plans (PEPs),” says Joseph W. Valletta, author of the “401k Averages Book.”

Reader Responses March 15, 2021

SURVEY SAYS: Would You Invest in an Annuity?

PLANSPONSOR NewsDash readers tell whether their companies offer annuities in their defined contribution (DC) plans and whether they would invest in annuities if offered.

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Last week, I asked NewsDash readers, “Does your DC plan offer an annuity option as part of its investment lineup, and if it did, would you put some of your savings into it?”

More than two-thirds (68.2%) of respondents work in a plan sponsor role, 18.2% are recordkeepers/TPAs/investment consultants and 13.6% are advisers/consultants.

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Nearly all (90.9%) of respondents said their defined contribution (DC) plan does not offer an annuity option as part of its investment lineup, while 4.5% said their plan offers an annuity option as a standalone investment option. The remaining respondents said they do not know.

Slightly more than 4% said they already put some of their savings in into the annuity option offered by their plan. More than one-quarter (27.3%) said they would put some of their savings into one if it was offered, while 40.9% reported that they would not. The remaining said they don’t know.

Verbatim

I worked with group annuities for a long time years ago; I would really need to do my research first. I think I prefer managing my retirement savings myself.

We have a 403(b). there is not a ‘built-in’ annuity, but employees can annuitize their funds in retirement. My concern about a built-in annuity is locking up the funds, making it very difficult to change vendors and automatically move funds

Don’t know enough about them to participate personally.

Our product provider offers a lifetime income option, but our plan does not include that option. I think they are concerned about employee education that would be needed. Go figure!

As long as the major recordkeepers offer annuites outside the DC plan, I doubt we will see an uptake of annuities inside the DC plan. Sponsors have no reason to adopt them in the plan while the recordkeeper offers them as a rollover option and no fiduciary downside. Participants deny the need for annuities and their lack of financial literacy to understand the value of delaying the Social Security annuity does not help. We have done a reasonable job, not good but reasonable, driving home the need to accumulate retirement assets. We have just begun the discussion of how to decumulate assets. Unfortunately, that discussion is still at the plan level as most Boomers have entered the withdrawal phase.

It is the way of the future, but it likely requires more collective DC arrangements to provide the size needed to manage and administer such and to have a large enough group to continue the plans for the long term.

It is not yet in our plan; we’re watching the regs. We offer a variety of distribution options, thus are waiting for the mandate before doing anything.

Annuity fees are way too high. Most people would be better off without annuities.

Deferred annuities are low-cost and enhance old-age consumption a lot!

The fees on annuities are too high to justify use within DC plans. Also, most recordkeeping systems, outside of insurance companies are not built to handle annuities so it requires manual work to maintain/track payout information.

Recognizing what a pain they are for defined benefit plans and cash balance plans and the unfavorable rates charged by insurance companies, I would certainly not want to incorporate them in my plan.

Annuities get a bad rap sometimes but where else can you get a lifetime stream of income? You cannot outlive an annuity.

 

NOTE: Responses reflect the opinions of individual readers and not necessarily the stance of Institutional Shareholder Services (ISS) or its affiliates.

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