As the retirement crisis deepens and more aspiring retirees are concerned about their retirement prospects, narrow returns and market volatility take the brunt of investors blame. However, as investor confidence wavers, it may be time to take a closer look at the role investment options and fees play in chipping away at gains.
Group annuities are common among 401(k)s because they appear to be cost effective, turnkey options. However, careful due diligence will reveal they are big aggressors when it comes to fees that hinder portfolio growth.
The retirement plan industry is changing and awareness of fees is at an all-time high. It wont be long before 401(k) plan participants begin taking a closer look at the cost of group annuities. For 401(k)s using a group annuity structure for their 401(k) plans, now is a good time to get informed about the cost of group annuities and the surprises waiting for you and your employees.
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Here are four things to know about group annuities right now:
Fee structure is largely hidden. Fees in group annuities can range between 3.5% and 5%. Because group annuities are technically an insurance product, they are not required to disclose fees in the same manner that other investments must. This makes it more difficult for 401(k) plans and their corporate sponsors (employers), to determine the real cost to plan participants inside these group annuities.
ERISA offers specified protection. Since an insurance company is providing services only to the annuity and not to the individual investor, it is not considered a covered service provider (absent some unusual circumstances) under the Department of Labors ruling on Section 408(b)(2). As it is not an ERISA fiduciary in this role, it is not generally subject to the requirement of plan fiduciaries.
The 401(k) plan fiduciaries are personally liable. When it comes to 401(k) plans, those individuals who make the decisions are fiduciaries. Should it be determined that the participants were damaged, no corporate vail can protect these fiduciaries. 401(k) plan fiduciaries are held personally liable for damages caused by their decisions.
These costs materially hurt retirement savings. With such high fees, it is even harder for investors to build their nest eggs. The impact of fees needs to be conceptualized with a long-term perspective, looking at how fees can add up over time and how they stand to be affected by inflation. When considering how a 5% fee now can chip away at savings 25 years down the line, it makes a big difference on outlook.
The ultimate purpose of a 401(k) plan is and must remain to help achieve the participants retirement objectives. If your 401(k) plan is a group annuity, it may be time to speak with an independent RIA and determine what other plan options are available to you and your employees. Specifically, look for 401(k) plan designs offering an unbundled approach, low-cost and index ETF allocation portfolios for investment options.
Investors are demanding low fees and greater transparency and if your 401(k) plan is not providing it, participants may eventually investigate why. This could end up being a terrible surprise result of your costly effort to provide a retirement plan benefit to motivate employees.
Vern Sumnicht, MBA and CFP, is founder and CEO of iSectors, an outsourced investment manager that provides advisers access to their proprietary asset allocation models based on low-cost, index ETFs designed with various risk tolerances.
