Anyone who has spent more than a few minutes reading my blogs knows that I am a huge fan of DB plans as the primary retirement vehicle for participants. I personally like the idea of a 401(k) plan as a supplement, its original intent, to a primary retirement account, but certainly not as a primary vehicle for the vast majority of American workers. Much has been done to try to improve 401(k) programs from auto-escalate, to auto-enrollment, to changes in QDIA options, but there is much more that is needed to be done.
One of the “enhancements” that I initially appreciated was the idea of a target-date fund (TDF) as a QDIA option in lieu of a GIC or money market account. However, I’ve soured on these instruments because of their cost structure. Despite the fact that we now have more than $1 trillion in AUM in TDFs, costs have not fallen as rapidly as they should have. According to Morningstar the average TDF still charges 62 bps. Are advisors really adjusting their fund exposures frequently enough to justify this fee? After all, an individual participant could invest their retirement balances in pure index funds for mere pennies. Starting the year off 60+ bps behind the index is a lot to overcome. The compounding impact of years of higher fees will negatively impact one’s retirement accumulation.
As our retirement industry becomes more reliant on defined contribution plans, we are burdening our workers to fund, manage, and disburse this benefit. Do we also have to make matters worse by charging excessive fees for portfolios that are charging too much for the activity that is being conducted?