Filed Under:Life Insurance, Life Planning Strategies

ASPPA Criticizes Dēmos Report Conclusions on 401(k) Plan Costs

The American Society of Pension Professionals & Actuaries is questioning the conclusions of a report that claims the fees associated with 401(k) defined contribution plans outweigh the popular savings vehicles’ benefits.

The report, “The Retirement Savings Drain: Hidden & Excessive Costs of 401(k),” published by the liberal think tank Dēmos, New York, calculates that an “ordinary” American household will pay on average nearly $150,000 over their lifetime in fees or one third of their investment returns. The high cost, the report adds, is one that families in the current U.S. economy “can “scarcely afford to pay.”

“The country needs to implement one of the many more efficient retirement savings ideas that have been proposed by institutions and individuals across the political spectrum to give all Americans a reasonably priced means to save for retirement,” states the report’s author, Robert Hiltonsmith, a policy analyst in the Economic Opportunity Program at Dēmos.

Critiquing the report, ASPPA CEO and Executive Director Brian Graff says the study’s analysis is based on “irresponsible and unrealistic assumptions, including the assumption that the average fees for mutual funds in 401(k) plans are almost 200 basis points (2 percent). The only thing proven by this report is that if you use ridiculous and biased assumptions you can reach ridiculous and biased conclusions.”

Graff adds that the Department of Labor’s new mandate, effective July 1, requiring retirement plan service providers to disclose all plan fees and services to help participants make more informed choices will increased fee transparency, generate greater competition among financial services companies, and thereby improve the value of these investments.

“Using bad math and faulty assumptions to try to justify turning private retirement savings over to the government is just plain wrong,” says Graff.

The report attributes excessive 401(k) plan fees to the “inefficiencies of an individualized retirement system.” The brief explores four major fee categories borne by employees, including administrative fees, marketing fees, asset management fees and trading costs.  

Observing that a significant portion of fees funds the high salaries and expenses of investment professionals managing 401(k) plans, the report claims that “asking struggling American households to pay these prices to save for retirement is more than patently unfair; it’s immoral.”

In his conclusion, Hiltonsmith calls for a “new retirement system” that would reduce plan costs and provide a lifetime income stream to savers. Among the vehicles he favors is a “guaranteed retirement account,” proposed by Dēmos Distinguished Senior Fellow Dr. Teresa Ghilarducci, that would minimize plan costs by, among other things, pooling assets.

“[GRAs] would not only mitigate 401(k)s’ risks but costs savers far less than the average 401(k),” Dēmos’ Hiltonsmith writes. “GRAs… would have total fees near the level of the average defined benefit pension plan, since the plan shares many of the advantages of the DBs, including pooling, [which] drives down their fees as well.”

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