The debate over exchange traded funds (ETFs) in 401(k) plans is intensifying. Many people want, even demand, a law that balances the cost and benefits of the transparency of investment and transaction fees. Experts say the law must be crafted in such a way that disclosure isn’t a pain for employers, but is still meaning for workers.
The bill, sponsored by Rep. George Miller, D-Calif., would require firms to disclose fees, conflicts of interest and information on risk, return and objectives. Firms would also be required to offer workers an index fund as an investment choice.
Some say that the worst-case scenario is that such a law would lead to such high costs that firms would dump 401(k) plans altogether, says Robert Powell for Market Watch. Or the law could lead workers to choose the funds that are the least expensive, to their own detriment.
If plan sponsors were taking their jobs seriously, there would be more of a push to include ETFs in 401(k) plans.
Plan sponsors are required to understand and analyze all expenses including both administrative expenses and fund expenses. W. Scott Simon for Morningstar suggests that most plan sponsors don’t even understand what their fiduciary responsibilities are, so how can we expect them to act properly?
One section of the Employee Retirement Income Security Act (ERISA) puts it simply: a fiduciary shall discharge his duties with respect to a plan solely in the interest of the participants and beneficiaries and for the exclusive purpose of: (i) providing benefits to participants and their beneficiaries; and (ii) defraying reasonable expenses of administering the plan.
Likewise, the U.S. Department of Labor suggests that plan sponsors must "ensure that fees paid to service providers and other expenses of the plan are reasonable in light of the level and quality of services provided." This would require a degree of knowledge and specialty in matching fees paid with service providers. There appears to be a great gap, a disconnect going on here.
How can this happen if plan sponsors aren’t even aware of what they are selling?
As an employee, you should ask your Human Resource department why ETFs aren’t available to you! This might help get the ball rolling.
The ETF industry is going to be watching these developments closely. And as more people become educated about what fees are costing them, plan participants are going to being to get more discerning. Right now, there is no proper analysis of fees, and plan sponsors clearly don’t know what their responsibilities are.