Retirement plan fees can cost participants nearly $155,000 over the lifetime of the plan, a white paper released May 29 by Demos, a liberal think tank, stated. The American Society of Pension Professionals and Actuaries, however, says the paper’s conclusions are based on assumptions that result in “sensational,” but ultimately incorrect, findings about 401(k) fees.
“There’s been a great deal of concern about fees” in 401(k) plans, Brian Graff, CEO of ASPPA, told AdvisorOne on Thursday. “That’s why we started lobbying for disclosure 10 years ago. To suggest that most Americans are taken advantage of is an outrageous and unfounded claim.”
In the white paper, “The Retirement Savings Drain: Hidden & Excessive Costs of 401(k)s,” Demos concludes that a median-income, two-earner family will pay an average of $154,794, or 30.3%, in total fees over the lifetime of their retirement plan.
To come to that conclusion, the white paper considered a hypothetical household wherein a man and a woman, both of whom earn the median income for their age and gender every year of their 40-year working lives, invested in a separate but identical 401(k). The working lives were assumed to begin in 1965 (even though 401(k)s weren’t available until the early ‘80s) in order to avoid having to estimate future earnings and market returns, and so that the hypothetical couple’s returns wouldn’t be affected by an economic expansion or recession.
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Both workers began their career by saving 5.3% of their salary, gradually increasing the rate to 9.2% at age 65, without ever taking a withdrawal or missing a contribution. The 401(k) has two identical investments: a stock index fund and a bond index fund. The expense ratio for the bond fund is set at 0.72% based on the asset-weighted average expense ratio for its asset class. The stock fund expense ratio is set at 0.95%.
“Our fee numbers are actually conservative estimates,” Robert Hiltonsmith (left), policy analyst at Demos and author of the report, told AdvisorOne in an e-mail, “because they use the current (i.e., 2011) weighted-average expense ratio cited above for every year of the working lifetimes of the couple in our model (who work for 40 years between 1966 [and] 2005, chosen to be a midpoint in the business cycle), while in reality, expense ratios have declined by over 50% in the past two decades, meaning that our couple would have likely paid higher fees on their retirement savings in nearly all of the years they saved.”
The white paper assumes the trading fees for the stock fund in its hypothetical 401(k) are equal to the explicit expense ratio of 0.95% and trading fees for the bond fund are 0.50%, or 70% of its expense ratio. ASPPA, however, argues that “the assumption that trading fees are equal to the expense ratio has no basis in reality,” adding that “trading costs vary significantly based on the frequency with which the underlying investments are traded.” As such, it says, the paper’s assumptions are based on inaccurate data.
“In response to their criticism on trading costs (for which they provide no evidence whatsoever),” Hiltonsmith said, “we actually try to account for two different types of trading costs in our model: both the commissions paid by mutual funds to execute trades, and the bid/ask premium they must pay each time they buy or sell shares. We believe that, in fact, the assumption that the sum of both of these costs (which we refer to collectively as ‘trading costs’ in our paper) is equal to the explicit expense ratio is a reasonable one.”