The education
savings plans saw a 3.9% increase from the previous quarter, which ended with assets
of $157.5 billion, and a 21.6% increase from the same quarter a year ago, when
assets were $134.6 billion, according to Financial Research Corporation, a division of Strategic Insight, an Asset
International company.
In contrast to
other products, long-term mutual fund and exchange-traded fund (ETF) assets (excluding
affiliated fund-of-funds) increased 5.9% over the past quarter, from $9.592 trillion,
to $10.161 trillion, and increased 22% over the past year, from $8.328 trillion.
Estimated 529 plan net outflows were $800 million in the third quarter,
compared with outflows of $400 million in the same quarter a year earlier,
which means investors are successfully using 529 plans for their intended
purpose of QHEE (qualified higher education expenses).
Total assets of
529 prepaid plans reached an estimated
$22.069 billion as of the third quarter, a 2% increase from second-quarter assets of $21.636
billion and a 9.6% increase from assets of $20.131 billion in the third quarter
a year earlier.
Total 529 prepaid plan assets were an
estimated $22.069 billion as of the third quarter, a 2% increase from second-quarter assets of $21.636
billion and a 9.6% increase from assets of $20.131 billion in the third quarter
a year earlier.
When analyzing only the ten open
529 prepaid plans, assets increased 1.2% in 3Q12 and 11% since 3Q11. The total number
of active accounts for 529 prepaid plans was 1,372,270, a 1.1% decrease from
2Q12 active accounts and a 0.2% increase since 3Q11.
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The Department of Labor’s (DOL’s) 408(b)(2) regulation
requires retirement plan providers to give plan sponsors information about the
costs associated with recordkeeping and administering their 401(k) plans.
Employers now have the means to fulfill their fiduciary duty in understanding
the true cost of plans, and some may consider changing providers as a result.
But sponsors should beware when evaluating other potential
providers that hidden costs may exist. “When plan providers submit proposals
for a company’s retirement plan business, they may not be clear about the
revenue they receive from the companies that provide the investments and the
actual cost of services provided with the plan,” said Brandon Bellin, senior
associate actuary at Securian Retirement.
At the time of the proposal, there is no obligation for
providers to show 408(b)(2) information—rather, the information may be provided
at the point of signing the provider documents, Bellin told PLANADVISER.
Bellin explained the “games” providers can play with hidden
costs, and the questions plan sponsors and advisers can ask to ensure they have
the proper information.
Game
#1: Revenue sharing. Retirement plan providers receive payments,
called revenue sharing, from investment companies for including their
funds in the provider’s investment selection. Providers may show plan
sponsors initial proposals that include investment options with low
revenue sharing, and therefore lower total cost, implying they are less
expensive and a good value. Later, the provider may suggest a “better”
lineup that pays higher revenue sharing and drives up plan costs.
(Cont’d…)
What to ask: Does your pricing depend on the investments
chosen? If the provider says yes, that is a
warning sign that it makes more money on certain investments than others,
Bellin explained.
Game
#2: Proprietary target-date funds (TDFs). Plan providers can generate
additional revenue by offering TDFs from an affiliated asset manager. In
these cases, investment management expenses can be unreasonably high for
the underlying funds. For example, many TDFs that invest in passive index
funds have expense ratios more typical of funds with active managers. This
additional revenue allows the provider to make its base recordkeeping
pricing appear lower. “People don’t generally ask what the TDFs invest
in,” Bellin cautioned. “From a provider perspective, it’s a place to bury
the extra revenue.”
What to ask: Do you offer proprietary funds? If so, do you offer TDFs from an affiliated investment
company, and what mix of passive and active funds do those funds invest in? If
the provider does have proprietary funds and mixes passive and active funds,
the sponsor or adviser can compare the expense ratio to alternatives in the
market that have similar investment styles, Bellin said.
Game
#3: Managed accounts. For
an additional fee, employees can purchase “professional management”
services for managing the assets in their retirement accounts. These fees
can be large and may exceed the actual cost of providing managed accounts,
allowing the provider to reduce base recordkeeping fees. Providers may
even require employers to offer managed accounts to receive the “lower”
pricing offered in the initial proposal.
What to ask: Are you affiliated with an investment manager? If so, this is a potential warning sign that the provider
may try to drive additional revenue. The sponsor or adviser should also ask if
the pricing depends on offering the managed accounts. If the provider is
receiving more money on certain investments than others, this is a red flag.
Even if the provider is not affiliated with an investment manager, managed
accounts are provided at a cost for the participants and the plan. While Bellin
said there is nothing wrong with these costs, they should be included in the
analysis of total costs from the provider.
“Plan sponsors who are unaware of the hidden revenues and
fees associated with a particular retirement plan provider’s proposal put
themselves at risk if they move their plans to that provider,” Bellin said.
“It’s important that they demand full fee disclosure from any retirement plan
provider and that they ask the provider to confirm that its revenue does not
vary based on the investments chosen.”
Ultimately, the plan sponsor should be comfortable with the
provider choice from a fiduciary perspective and should choose a provider
without red flags that is neutral with investment selection, Bellin said.