The heat is on in the 401(k) industry, and the push for changes could wind up being a boon to exchange traded funds (ETFs) if those in power are listening closely and if investors fight for themselves.
The criticism of the 401(k) industry is getting louder and harder to ignore, and even Congress is paying attention. Rep. George Miller has a schedule of reforms that many investors and experts would like to see implemented. Rep. Miller is taking the mutual fund industry to task over their hand in the decimation of many individual investors’ portfolios, and this could solidify the case for ETFs to enter into this investment arena once and for all.
There are two big issues here: extremely poor fee disclosure and a lack of good education. Rep. Miller is working hard to take on this issue on both fronts.
This Sunday’s 60 Minutes focused on the need for more reform within the 401(k) industry. Watch it at CBS’s website.
In the interview, Rep. Miller called for more fee transparency and portrayed the fund industry as aggressively opposed to this as their fee revenue would be lost. In the report, which should make every investor angry, he held up a prospectus and challenged anyone to find the dozen-plus fees investors are socked with on an annual basis. Some can be located, but many can’t. And good luck understanding the prospectus at all – it’s a rare one that’s written in plain English.
60 Minutes also attributes the rise of the 401(k) industry to the ease of exploiting novice investors, says Joe Morris of Ignites. Many mutual funds recommended for plan inclusion are just average, the 60 Minutes report said, and often investors who have no expertise or understanding of mutual funds are asked to make difficult choices about the very investments that could determine their futures.
Today, the Rep. Miller’s Health, Employment, Labor, and Pensions Subcommittee held a hearing on new fee-transparency legislation, reports Sara Hansard for Investment News. The 401(k) Fair Disclosure for Retirement Security Act of 2009, will “help workers shop around for the best retirement options by requiring simple fee disclosure on the investment options contained in their employer’s 401(k) plan.
In the interim, trillions of dollars are disappearing from workers’ plans. If you are young enough and in the earlier stages of your career, there’s time to rebuild and recover, but if you are in your 50s, 60s or beyond, the consequences can be dire. Many workers are being forced to delay retirement, or scrap those plans altogether. It has jeopardized the financial well-being of millions of people, reports 60 Minutes.
The mutual fund industry is working hard to defend itself, and the Investment Company Institute (ICI) released a report about 401(k) fees that was funded by mutual fund providers. The study found that the median fee was 0.72%, but it was a wide range even in a small sampling. Some had “all-in” fees of 0.35% or less, while other had 1.72% or more.
The all-in fee was based on four primary service elements, but excluded participant activity-related fees. How is anyone supposed to wade through all of this?
The case for ETFs is getting stronger, as the fees are clear and make sense. Investors need to join this fight and ask their human resource representatives to get plans with ETFs, and insist on clarity and transparency.
No one will look after your money like you will, and until the 401(k) and mutual fund industries are as gung-ho about protecting your retirement savings as you are, you would be well-served to educate yourself about these plans and be your own best advocate.