The mutual fund 401(k) retirement plan industry is under fire as new disclosure laws will give investors a glimpse of what they are actually paying for, providing a chance for the upstart exchange traded fund industry to jump in.
At the end of August, the new Department of Labor rules on fee transparency will take effect, requiring 401(k) funds to disclose underlying investment expense ratios and the amount per $1,000 it costs to be invested in those funds, reports Tom Gonnella for RIABiz. [What is an ETF? — Part 18: 401(k) Plans]
According to a Deloitte and the Investment Company Institute study, investment expenses in 401(k)s make up 84% of a plan’s cost.
The new fee disclosure laws may be a boon for the low-cost, highly transparent, passively managed ETF industry. Due to their passive nature, most ETFs do not require a hefty management fee – the average ETF comes with a 0.55% expense ratio.
For example, in a hypothetical $25,000 investment with a 1% fee disparity, the difference between a 6.5% return and a 7.5% return on the investment over 20 years amounts to $18,105.15. Over extended periods, the small 1% will accumulate.
Additionally, ETFs come in a more tax efficient structure, but this key selling point does not apply as much to the 401(k) market as much as it does with retail equities investors.