Larger 401k plans are not immune to the severe cost inefficiencies that are common in the retirement plan world, according to new data.
“A large plan can negotiate a number of things. such as institutional shares and investments in trusts, which oftentimes have very low expenses but the findings indicate that large plans don't take advantage of these opportunities that are available to them because of their size,” said Daniel Satchkov, CFA and president of RiXtrema in New York
The average overspend on investment expenses for plans that are $50 million to $100 million in size is .35 percent, which is not that much less than the .41 percent overspend for plans the size of $1 million to $10 million, according to RiXtrema data.
“Financial advisors who serve as 3(38) or 3(21) fiduciaries to a 401k plan need to analyze in more detail the mutual fund menu offering of these accounts and do more quantitative analysis because right now the analysis is mostly qualitative,” Satchkov said.
RiXtrema analysis on 7,472 retirement plans from the Department of Labor EFAST database found that plan participants could save on average .44 percent a year by switching into lower cost investments that are quantitatively very similar to those they already hold.
“You would think that a large class sponsor would have the money in their budget to do basic research or hire the right people do it for them but apparently they're not doing as good of a job as they could be,” said Satchkov.
With a 401(k) asset total of $2.8 trillion,.44% a year is savings is a potential of some $12.3 billion.
To secure those savings, Satchkov recommends advisors supplement the traditional tools with more detailed, quantitative analysis. Traditional tools include Morningstar ratings.
“I'm not saying they're bad, but in addition to Morningstar, they need to do a more detailed analysis of the menu,” said Satchkov, who added that RiXtrema offers 401kFiduciaryOptimizer to help advisors employ more quantitative analysis.
Juliette Fairley is a business and finance journalist who has written four personal finance books and has written for major news organizations. Juliette can be reached at [email protected]