Benefits April 11, 2014

Think Tank Recommends New Type of Fee Disclosure

April 11, 2014 (PLANSPONSOR.com) – The Center for American Progress in Washington, D.C., recommends adding a label to retirement plan communications for participants.
Reported by

The center’s report “Fixing the Drain on Retirement Savings” contends that high 401(k) plan fees are costing participants tens of thousands of dollars and forcing them to work years longer before retiring. According to the report’s authors, Jennifer Erickson and David Madland, there is a common-sense solution that will protect participants by improving retirement fee disclosure. 

Picking up on the best parts of other public disclosures such as nutrition labels, cigarette warnings and Energy Star labels, a “Retirement Fund label” would be a visible box on all literature, either printed or Web-based, that offers a simple disclosure to both inform consumers about the risk of high fees and offer them a clear and comparable way to think about their fund options, according to the report.   

Get more!  Sign up for PLANSPONSOR newsletters.

The center offers an example of what a label may look like:

Retirement Fund Label

The report authors contend that one of the problems with current fee disclosures is they fail to give investors useful comparisons. To provide more relevant information about the true cost of fees, they say, disclosures should show a fund’s fees compared with similar funds that are low cost. In addition, the authors suggest, if fee disclosures are poorly accessible during the limited time many Americans spend planning for their retirement, such information will have little value.

“Every day, Americans are investing hard-earned dollars in retirement accounts that aren’t working for them,” says Erickson. “Confusing and hidden fees are eating away at their savings, forcing them to work longer and save more. It’s time to step up our nation’s consumer protections around retirement savings and ensure that workers and employers are armed with the information they need to make better choices about their investment options.”

Madland agrees, adding, “Better labeling of retirement fees is a no-brainer. At no cost to taxpayers, we can save workers a lot of money and make it much more likely that they can retire.”

The report can be downloaded here. A related infographic can be found here.

The Center for American Progress is an independent nonpartisan educational institute dedicated to improving the lives of Americans through progressive ideas and action. It covers such topics as energy, national security, economic growth and opportunity, immigration, education, and health care.
Benefits April 11, 2014

DC Participant Trading Down as More Use Professional Help

April 11, 2014 (PLANSPONSOR.com) – Recent research by investment management firm Vanguard indicates trading by participants of defined contribution (DC) plans has decreased by half over the last decade.
Reported by

Only 10% of defined contribution plan participants surveyed by Vanguard say they engaged in retirement-related investment trades in 2013, according to Jean Young, senior research analyst at the Vanguard Center for Retirement Research. This is down from 20% in 2004.

However, this does not mean participants are sitting still when it comes to investing. Rather, says Young, more DC participants are making use of professionally managed funds or allocations. If this trend continues, the figures for trading by individual participants may decrease even further, according to Young, who is based in Valley Forge, Pennsylvania.

Get more!  Sign up for PLANSPONSOR newsletters.

Young tells PLANSPONSOR, “In 2005, the [mutual fund] industry adopted 60-day round-trip rules. This means that if a participant sells an equity mutual fund, [he] cannot repurchase it for 60 days. We attribute the decline in participant trading levels from 2004 to 2005 and 2006 to 2008 to this rule change.”

However, Young adds, “We’ve also found that over the past five years the adoption of professionally managed allocations [PMAs]—in particular target-date funds [TDFs]—has just about doubled. At the end of 2008, just 22% of participants were in a PMA, while the number was 40% at the end of 2013.” She estimates that, over the next five years, this figure will climb to as high as 58% of defined contribution participants.

Among the four in 10 Vanguard defined contribution plan participants that were invested in a PMA in 2013, their entire account balances invested in: a single target-date fund; a single target-risk or traditional balanced fund; or a managed account advisory service.

Young notes that research has shown it is very difficult to time the market successfully. “Assuming participants start with appropriate asset allocations, less trading is generally a good thing. On the other hand, more participants should probably trade than do,” she says, adding that participants who are not in a PMA and are do-it-yourself investors are “really all over the map, with nearly a quarter of this group holding extreme portfolios—either zero or all equities.”

According to Young, more participants should be rebalancing their portfolios to a target asset allocation. Participants in PMAs do not need to trade because an investment professional is rebalancing the portfolio for them.

More information about Young’s research on this topic can be found here. Related research about trends in target-date funds can be found here.

«