Whether it’s Bob Clark, my colleague over at ThinkAdvisor who recently opined on what 401(k) plans should cost, or a certain law professional at a deep blue school, who recently threatened to expose plan sponsors who pay “high” fees, the subject of 401(k) fees, strangely dormant since the advent of 408(b)(2) last summer, has erupted with a frenzy this summer. Through all this bickering, though, no one has stood up and identified the real issue with 401(k) fees.
It’s not the high cost of regulation, as one of Clark’s readers mentioned, although there certainly is a cost to regulation. It’s not service providers who gouge their clients, although, without a strictly enforced fiduciary rule, the possibility certainly exists for this to happen. It’s not naïve plan sponsors duped into believing they can get a 401(k) plan “for free,” although you definitely don’t have to be naïve to be duped.
No, as explained in “What is an Appropriate Fee That a 401(k) Plan Should Pay?” (FiduciaryNews.com, Aug. 6, 2013), the real issue amounts to simple math – and there’s very little anyone can do about it.
It comes down to the law of numbers, specifically, the law of large numbers. Perhaps you can blame regulation, but it doesn’t change matters that much. There are certain base costs, you might call them fixed costs, associated with maintaining a viable 401(k) plan. From a dollar standpoint, these costs are small and, when equally distributed among a great number employees, amount to very little in terms of basis points (the standard measure for 401(k) fees). The trouble occurs when there are not enough employees to spread these costs around. Then the fees are large (again, in terms of basis points).