Starting Jan. 1, 401(k) plan vendors will have to start disclosing their fees to plan sponsors, and the latter will have to start disclosing fees to plan participants.
The increased disclosure will mean that advisers who service the 401(k) market will be under more pressure to justify the cost of their plans. In many cases, advisers will turn to lower-cost investment options, such as index funds and ETFs, to help protect their own margins, industry observers said.
“Ultimately, there is going to be fee compression, and that's going to hit advisers,” said Ryan Alfred, co-founder of BrightScope Inc., which rates plans. “So firms like Schwab are trying to partner with advisers so that the advisers can still make 25 to 45 basis points on 401(k) plans, with costs that won't be too high [for the plan participants].”
The average domestic-equity index fund has net expenses of 0.89%, compared with an actively managed domestic-equity fund, which has net expenses of 1.35%, according to Morningstar Inc. The average domestic-equity ETF has a net expense ratio of 0.52%.
Lower-cost passively managed funds have been successful in the large-plan market, or those plans with more than $100 million in assets, for some time, according to BrightScope. Between 2007 and 2009, there was 125% growth in plans with large-cap-equity index funds, BrightScope said.
"Ultimately, there is going to be fee compression, and that's going to hit advisers," said Ryan Alfred, co-founder of BrightScope. "So firms like Schwab are trying to partner with advisers so that the advisers can still make 25 to 45 basis points on 401(k) plans, with costs that won't be too high" for plan participants. InvestmentNews (free registration)
