City University of New York



PROBLEM MEMORANDUMTO: Thomas E. Perez, The Secretary of LaborFROM: Jonathan ShenkmanRE: (SUBJECT) High 401k fees in corporate retirement plansDATE: FEBUARY 16th, 2015Since its founding in 1978, 401k plans have become increasingly popular with American businesses (Revenue Act of 1978). Employers have gradually transitioned their existing retirement benefits from defined benefit plans (i.e. pensions) to defined contribution plans like the 401k. The major advantage of a defined contribution plan is that it moves the onus of saving for retirement from the employer to the employee. I believe that this transition is good for American business and, ultimately, the economy. Individuals should take responsibility for their own financial future and not have to depend on their former employer. However, I take issue with the excessive fees that are charged in many of these plans and the lack of transparency regarding those fees. I’d like to request that the Secretary of Labor put a ceiling on what can be charged to investors and require greater fee transparency to the consumer. I believe this will help improve these plans and also add much needed money into the pockets of the consumer instead of the plan’s administering financial institutions.The myriad of charges in the average 401k plan is enough to confuse even the savviest investor. The following is a list of some of the associated costs.Plan Administration Fees?– This includes the administrative aspects of managing the 401k including recordkeeping, accounting, legal work and trustee services (Franklin). Individual Service Fees?– This fee may be assessed if a plan participant decides to take a loan from their 401k. It is assessed on each account on an individual basis (Powell). Investment Fees?– This is associated with managing the investments in a plan and serves as the largest component of all the fees. It is generally assessed as a percentage of assets under management. For example, if an investor has $100,000 and the investment fee is 1% then the participant is paying $1,000 every year for the management of their investments. If the value goes up, then the participant will pay more money. One tangential question worth asking is what the participant is getting for these fees (Employee Benefits Security Administration).Sales Charge?– This is also known as a commission or load. Depending on the type of mutual fund a participant purchases in the plan, there are different commissions associated with it. To lower cost, participants may choose to avoid purchasing the more expensive products in their plan. Instead of purchasing an A shares, which is a front-load, or a C-share, which is a level load, consumers may want to stick with no-load funds that have no sales charge at all (Office of Investor Education and Advocacy).12b-1 Fees – These are the expenses that are passed along to investors to cover the mutual funds marketing and sales costs (12B-1 Fee). Redemption Fees – If an investor redeems their mutual fund shares before a specified amount of time, there is a fee assessed to the investor as a penalty for liquidating the fund (Pirraglia). Variable Annuities – If an employer elects to have variable annuities in their plan, there are a whole host of additional costs to the investor. Some of these costs include mortality risk charge, surrender charges, sales charges and the fee for issuing contracts (Robertson).Miscellaneous Fees – There are a variety of miscellaneous fees, which may include providing statements to participants, offering a question call-in hotline for participants, and any other item not in the aforementioned categories (Employee Benefits Security Administration).Excessive fees, distributed among the various layers of fees mentioned above, can significantly impact an investor’s retirement account. As a practical example, assume a teacher, Sally, worked for 40 years and managed to put away $5,000 for retirement every year. She earns a 7% return on her money after fees and at retirement she has a nest egg of almost $1.1M. Now assume say she can reduce her annual expenses by 1%, which will increase her annual return to 8% a year. Her nest egg at retirement will be about $1.4M. That’s an additional $330K in Sally’s bank account to help her get through retirement without having to rely on family, friends, or the government for support (Compound Interest Calculator). I firmly believe in paying for good service. However, it is imperative that clients be able to determine what their fees are before deciding to pay them. I think that many investment professionals are taking advantage of their clients due to the lack of transparency in the system. If details about fees in 401k plans were more readily available to the public, investors would be able to make more informed decisions leading up to retirement. Increasing transparency will not only benefit future retirees, but it will also benefit future generations who won’t be stuck paying for the care of millions of Americans who don’t have enough money once they retire.Works Cited"12B-1 Fee."?investopedia. Web. <terms/1/12b-1fees.asp>.Compound Interest Calculator. Moneychimp. Web. < Benefits Security Administration. "A Look At 401(k) Plan Fees." . August 2013. Web. <, Mary Beth. "The High Cost of 401(k) Fees: How Much Are You Paying?" . May 2008. Web. < of Investor Education and Advocacy. " Mutual Fund Fees and Expenses." SEC. Web. < , William. "What Is a Redemption Fee on a 401(k)?" finance.. Web. < , Robert. "9 things you need to know about 401(k) fees." . 8 July 2014. Web. < Act of 1978. Pub. L. 95-600. 92 Stat. 2763, 2785. Sec. 135(a). 6 November 1978. Web.Robertson, Stuart. "Why Variable Annuities Have No Place in Your 401(k) Plan." Forbes. 17 February 2012. Web. <;. ................
................

In order to avoid copyright disputes, this page is only a partial summary.

Google Online Preview   Download