401(k)s - fees and returns
The first brief finds 401(k) fees "so complex, confusing, or obscure that many sponsors and participants report that they do not understand either their magnitude or their consequences." The report raises three design issues: (1) charging a percent of assets, which often varies by type of asset, does not allow participants to weigh benefits against costs of their plan's services; (2) a constant expense ratio transfers wealth from higher balances to lower ones because twice the assets do not incur twice the management cost but participants pay twice the fee; and (3) 401-(k) funds in asset pools with other investors "can decouple fees and costs in a way that needlessly reduces" the returns on those 401(k)s.
The second brief discusses guaranteed returns, particularly in light of the current financial crisis that has "decimated" retirement accounts. It considers the cost and effect of guarantees in retrospect, specifically smoothing replacement rates and avoiding sharp drops, and prospective guarantees. The brief concludes that "the feasibility of providing attractive guarantees for returns in a new tier of savings accounts depends on whether applying private insurers' risk preferences to the government is appropriate."
The Structure of 401(k) Fees, Feb. 2009
Report (pdf, 8pp/148kB)
What Does It Cost To Guarantee Returns? Feb. 2009
Report (pdf, 14pp/276kB)