The Markets July 14, 2014

401(k) Investors See Lower Mutual Fund Expenses in 2013

Participants of 401(k) plans saw lower expense ratios when investing in long-term mutual funds during 2013, according to a report from the Investment Company Institute (ICI).
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“The Economics of Providing 401(k) Plans: Services, Fees and Expenses, 2013” shows that at year-end 2013, nearly 38% of 401(k) plan assets were invested in equity mutual funds. In 2013, 401(k) plan participants who invested in equity mutual funds paid an average expense ratio of 0.58%, down from 0.63% in 2012.

Similarly, expense ratios that 401(k) plan participants paid for investing in hybrid mutual funds fell from 0.60% in 2012 to 0.58% in 2013. The average expense ratio 401(k) plan participants incurred for investing in bond mutual funds dropped from 0.50% in 2012 to 0.48% in 2013.

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One reason for this decrease is that participants in 401(k) plans tend to pay lower fees than fund investors overall, according to the report. The 0.58% paid by 401(k) investors in equity funds is lower than the expenses paid by all equity fund investors (0.74%) and less than half the simple average expense ratio on equity funds offered for sale in the United States (1.37%). The experience of hybrid and bond fund investors is similar.

“It is clear from our study that 401(k) participants investing in mutual funds tend to invest in lower-cost funds,” says Sean Collins, ICI’s senior director of industry and financial analysis, who is based in Washington, D.C. “This tendency on the part of investors sets up a competitive dynamic within the fund industry, as funds strive to provide ever better services at even more competitive prices. This dynamic is amplified to the benefit of retirement savers through the design of the 401(k) system, in which plan sponsors as fiduciaries select mutual funds as investment options for their plan.”

The report finds that this decrease in expense ratios is part of a pattern that has been going on for more than a decade. In 2000, 401(k) plan participants incurred expenses of 0.77% of the 401(k) assets they held in equity funds. The 0.58% incurred in 2013 is a 25% decline. The expenses 401(k) plan participants incurred investing in hybrid and bond funds also fell from 2000 to 2013, by 19% and 21%, respectively.

Several other factors contribute to the relatively low expense ratios of mutual funds offered through 401(k) plans, according to the report. They include:

  • Competition among mutual funds and other investment products to offer shareholders service and performance;
  • Plan sponsor decisions to cover a portion of 401(k) plan costs, which allow them to select lower-cost funds or share classes;
  • Economies of scale, which large investors such as 401(k) plans can achieve;
  • Cost- and performance-conscious decisionmaking by plan sponsors and plan participants; and
  • The limited role of professional financial advisers in these plans.

More information about 401(k) plans can be found at ICI’s 401(k) Resource Center. A copy of the report can be downloaded here.

Data & Research July 14, 2014

Q-and-A: Does Participant Education Actually Help Participants?

Does educating participants on savings behaviors and investments have an actual, measurable effect that can drive better retirement outcomes?
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Does education actually encourage employees in a sponsored retirement plan to save more, and does it help them learn more about investments and other aspects of the plan, or is it a waste of time? A survey of advisers and providers shows lack of consensus in the industry. Factors such as participant age and life stage, and awareness of peer savings behaviors can affect how someone responds to education.

Jason Chepenik, managing principal of Chepenik Financial

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The answer is sometimes. And it depends. A person’s stage of life is very important If it’s a young person who has their first child and is very interested in understanding proper personal financial stewardship, education can have a lifelong impact. Having life insurance; legal documents; saving 10%— they’re hungry for knowledge. If the individual is approaching retirement, I can help them understand they only have to pull out a little at a time. Between those two barbells, people are very distracted. Life gets in the way. If it’s one-on-one and they’re open to asking questions, I can make a difference. 

It hurts me to say out loud, because I’m a financial planner, and I’m good at teaching people. But those general sessions? You have very little impact on the message. I can teach them that the most important thing is savings rates, not investment expenses, not stocks or bonds. Save-save-save, and don’t have any debt. But only a handful of people are going to be interested.

David de Wetter, director of talent management and organization alignment for Towers Watson

Consider combining education efforts with some social networking. You’re doing it because you want some return, and it’s an employee value proposition.You want employees to fully understand the value of what they have, and to be able to fully avail themselves of the benefit. You want them to know it and appreciate it. 

But what’s really interesting is the effect of social networks on savings behaviors. A professor in financial behaviorism found that when it comes to plan behavior, it’s not enough to talk about the need to save 15%. More effective is letting them know the saving rates and contribution rates of their coworkers. Education will boost it, but combining it with social network data? That will absolutely drive it.

Bellaria Jimenez, managing director of MetLife Solutions Group

Employee education can be helpful. I have seen it move the needle. Consumers have been getting their own information, trying to understand investing better. The financial education they get through retirement programs helps them make better choices and ask questions they wouldn’t have asked in the past. Depending on whose lens you’re looking through, it is valuable. You’re giving them the right tools. 

Plan sponsors might want to consider that if their participants become more educated consumers, they might want to choose different products that the plan doesn’t offer. Participants still don’t have as much knowledge as they need. Education is useful for explaining that sometimes the market is great, and sometimes there are dips.

David Ray, national sales manager, managing director and head of the higher education segment at TIAA-CREF

Education combines well with advice. Engaging employees and providing customized advice helps drive better decision-making. According to our research, among the employees that tapped in-person retirement advice, 68% percent chose to either save more, change their future allocations or rebalance their portfolios. A separate analysis revealed that employees who recently used online advice services also made changes – 54% saved more, changed their allocations or rebalanced their portfolios. Education empowers participants to think critically about their retirement strategy and become confident they’re taking the right steps toward a financially secure future.

J. Kevin Stophel, an adviser with Kumquat, a wealth management firm in Tennessee

It really doesn’t change outcomes. The research I’m seeing is that participant education is really a fiction when it comes to changing outcomes. Most often, outcome is driven by plan design components. You can’t turn a financial non-sophisticate into a financial sophisticate. 

When it comes down to dictating part outcomes, far and way, the largest contributor to a secure retirement is the amount they actually defer. One of the myths participants believe is that it’s the growth of an investment. But research says it’s the amount that’s the most significant indicator of security. The automatic design features are critical to achieving a secure retirement outcome, but they are being significantly overlooked in education. 

Out in the field, we’re trying to help trustees understand, even though it’s accepted practice to spend time talking about investments, when it comes down to asset allocation or the investment manager, those have less impact than the amount deferred. Education has a marginal benefit for a few participants, and drives no real substantive change. There should be much stronger focus on auto design features.

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