In the investment biz, it's a tale of two meetings this week.
In Scottsdale, they're attending the annual Fiduciary360 confab, where fiduciary principles and practices form the programmatic core of the three-day event. Across the country, in Washington, D.C., we have the general meeting of the Investment Company Institute, the mutual fund industry's trade association.
Though the fi360 event is unlikely to make much news, the ICI meeting has made a few headlines already. Here's one that jumped off the screen at us: "401k fee critics overstate problem, ICI chairman says." From InvestmentNews (emphasis added in bold):
"What they don't mention is the long list of services that 401(k) plans provide," including investment management and record keeping as well as legal services, audits, websites, call centers and participant education, John Murphy, chairman of the Investment Company Institute, said in a speech to about 800 mutual fund executives at the group's general meeting in Washington.
Legislation introduced by House Education and Labor Committee Chairman George Miller, D-Calif., would require more disclosures of 401(k) fees.
In response to charges that plan fees are too high, Mr. Murphy cited a recent ICI-sponsored survey which showed that total fees for the plans were 0.72% of assets, "quite a bargain compared to the 3% that some critics cite."
He also said that "disclosure is not just about fees," adding that reports should include information on risks, performance and investment objectives. Disclosures, however, must be useful, and they should not overwhelm sponsors and participants "with data that they don't need," Mr. Murphy said.
Where to begin?
First, it's the very height of cynicism to list all the services "401(k) plans provide" in one breath, then cite a number (0.72%, which is the dubious number ICI claims is the average explicit expense--the expense ratio itself--of funds held in 401(k) plans) that not only excludes many of those services, but doesn't even reflect the true cost of mutual fund ownership.
As we've noted time and time again (here and here, for instance), mutual funds' implicit costs are difficult to pin down with absolute precision, and they don't show up in any prospectus (though trading commissions are reported in the Statement of Additional Information, always well-read by rank-and-file investors and their advisors, of course!), but they come out of investors' returns all the same.
We've heard that ICI personnel, when confronted by Capitol Hill over the incompleteness of "0.72%" (a number so thoroughly dubious as to deserve quotation marks every time it's cited, and we're happy to start that practice right here), respond by saying that they can't account for the services delivered and fees charged by professionals outside their own realm. True enough! But that means ICI can't cite a "long list of services 401(k) plans provide" that includes many services mutual fund companies don't provide. That seems pretty straightforward to us.
Second, that "average" cost of "0.72%" is misleading insofar as it's pulled lower by plans with truly rock-bottom investment expenses, and those plans are out there. Unfortunately, tens of millions of participants--and, by extension, their beneficiaries--are saddled with substantially higher explicit expenses, to say nothing of the fact that implicit costs tend to scale up in rough proportion to explicit costs.* So while the relative few might enjoy investment expenses of 20 or 30 basis points, the vast majority face true costs well in excess of "0.72%."
Third, "0.72%" doesn't include any annuity-related charges, which, alas, affect a shockingly large number of participants, many of whom are blissfully unaware of this particular problem.
Finally, while it's certainly possible to bury participants and sponsors under excessive information, the simple, obvious fact is that it's beyond easy to summarize and convey information on expenses and other plan characteristics to participants. The only question that matters is: Do you want to?
401(k) and other defined-contribution plans imply certain costs. But there's a blindingly clear divide between those meeting in Scottsdale this week, who want to reduce and disclose the true and total expenses investors incur, and those meeting in Washington, who commission unserious surveys, then spin the heck out of the place, in an effort to conceal the unpleasant realities of a defined-contribution system that's salvageable, and worth salvaging, but in need of bright light and serious reform.
The system is a lot like Steve Austin in the opening sequence of The Six Million Dollar Man. It's in pretty bad shape, but we have the technology. We can rebuild it. And rebuild it we must, with or without the ICI.**
* This is true to the extent that the factors associated with high explicit costs, high-turnover funds in relatively illiquid asset classes, tend to correlate with high implicit costs, precisely because of turnover and relative illiquidity.
** A couple caveats: (1) Our problem here is with the ICI, not with all mutual fund companies, let alone everyone who works in the mutual fund business and (2) we use mutual funds in our 401(k) practice--inexpensive, index-based funds in every available asset class, but open-end funds nonetheless--so, again, our objections apply to ICI's political tactics, not all mutual funds.
Sara Hansard, "401k fee critics overstate problem, ICI chairman says," Investment News, May 7, 2009