For years, workers and consumer advocates have criticized 401(k) plans for their hidden fees and high overall costs. With so much money going to fund managers, even during the horrible periods for the stock market in 2008 and early 2009, many potential investors in retirement plans have gotten so disillusioned by what they perceive as greed from Wall Street firms that they've given up on 401(k) plans entirely.
Recent efforts to improve disclosure about costs associated with 401(k) plans have tried to address these concerns. According to a recent blog entry at SmartMoney, some large mutual fund companies have gotten the message, and they're responding by cutting fees for some of their retirement plans.
A number of well-known mutual fund management companies, including Janus (NYSE:JNS), Ameriprise's (NYSE:AMP) Columbia Funds, and the John Hancock division of Manulife Financial (NYSE:MFC), have chosen to offer new classes of popular mutual funds that feature lower costs. The blog post specifically mentions two funds, one from Putnam and the other from Sun Life Financial's (NYSE:SLF) MFS Investment Management, that have recently added share classes for retirement plans that have lower fees than other retirement-targeted shares.
Clearly, lower fees are a step in the right direction for 401(k) plans. But just because these share classes exist doesn't mean that you'll automatically be eligible for them.
For instance, take a closer look at the Putnam Fund for Growth and Income's statutory prospectus. In the supplement dated Oct. 10, you'll see that the company lists among investors eligible to purchase low-cost Class Y shares "qualified retirement plans that are clients of third-party administrators (including affiliates of Putnam) that have entered into agreements with Putnam and offer institutional share class pricing (no sales charge or 12b-1 fee)." That's a mouthful, but it strongly suggests that Putnam reserves its cheapest shares for employers that already have a direct or indirect relationship with the management firm. Similarly, with its Class R5 and R6 shares, the July 2 supplement explicitly says that those share classes are available only to plans with assets of at least $50 million.
Where the money is
Putnam certainly isn't the only company that treats its customers differently based on how much money they bring to the table. Even Vanguard, with its consistent record of offering low-cost investment options to its customers, gives customers with more assets better deals. Its Flagship service, for instance, is available to customers with $1 million or more in Vanguard mutual funds and ETFs and offers 25 commission-free stock trades as well as an exemption from service fees. That compares to commissions between $7 and $20 for Vanguard's entry-level investors.
The problem from a 401(k) context, though, is that you aren't the one who gets to negotiate with the fund company that will manage your retirement assets. Rather, it's up to your employer to do the heavy lifting on your behalf, and often, your employer will focus more on its own costs in providing a plan than on the costs that you bear.
Last gasp for 401(k)s?
Fees are only one part of the reason why many people consider 401(k) plans to have been a failed experiment in retirement savings options. With many workers not even having a 401(k) plan available for them to make contributions and many more choosing never to take advantage of an available 401(k) plan, they clearly haven't had the impact that many hoped they would when they were first created back in the late 1970s.
If employers refuse to take their fiduciary responsibility to their employees as plan sponsors seriously, then the best solution would be to remove employers from the equation entirely and allow everyone to have access to larger self-managed IRAs with annual contribution limits that incorporate current 401(k) limits. At least that way, workers would have total control over how much they pay, rather than being at the mercy of closed-door deals between employers and plan money managers. Until that happens, though, the best thing workers can do is closely scrutinize their 401(k) investment options to make the best of whatever choices they have.