News & Articles

401(k)’s Are Grand, for Fund Companies Anyhow

Sunday New York Times

If the sundry investigations into dubious mutual fund practices haven’t yet angered you, perhaps this will: The financial services companies overseeing some 401(k) plans are racking up annual profits that can exceed five times the plans’ costs.

This disturbing revelation comes courtesy of Brent L. Glading, a 15-year veteran of the mutual fund and 401(k) industry. A former high-level sales executive at Dreyfus Funds, Merrill Lynch and Massachusetts Mutual, he started the Glading gorup last year to show companies offering plans both what their 401(k)’s are costing employees and what they are generating in profits for the companies that run them. Armed with the data he supplies them, 401(k) sponsors can negotiate to get some of those profits back for plan participants.

Of the $10.2 trillion invested for retirement, $2.1 trillion sat in mutual funds as of the end of last year. Sad to say, but much of this is money that is sensitive to neither fees nor performance. And when it is in a 401(k), it is captive. Roughly $1 trillion is locked in corporate-sponsored 401(k) plans.

Unfortunately, it is hard to see how profitable these plans are to Fidelity, Putnam and others. Corporations sponsoring 401(k)’s do have a fiduciary duty to ensure that the plans are priced reasonably. But when sponsors ask about the profits their plans generate, they are typically told the information is proprietary.

Mr. Glading’s firm found that one 401(k) plan, with $2 billion in assets and 20,000 participants, was generating $8 million in revenue each year for the financial services firm overseeing it. The cost of running the plan was $2 million.

Another client’s plan had $120 million in assets and 800 participants. Overseen by a big fund company that he declined to identify, this plan offered a dozen mutual funds. Half were run by outside fund managers.

He estimated that the fund company reaped $650,000 in annual revenue from the plan; its cost to run it was $80,000. Using this information, the plan sponsor negotiated a $300,000 rebate for plan participants.

Mr. Glading earns a fee only when he wins a rebate for a 401(k) plan. He charges 35 percent of the rebate the first year, and 25 percent the second. Fees are negotiable from then on.

Not all 401(k) plans are money machines. Mr. Glading said that 20 percent of the plans-the big ones-generate 80 percent of the industry’s profits. Smaller plans have higher costs.

Almost all the profits come from the investment management fees on the funds in the plan. But other fees can creep in. A broker may advise a plan sponsor on which funds to offer; the fund company winning this business typically pays the broker up to 1 percent of the plan’s assets. This comes out of workers’ hides annually.

How can you tell if your 401(k) is enriching an administrator? Mr. Glading said that 401(k) plans with the following characteristics are most likely paying too much: at least $50 million in assets, an average account balance of $25,000 or more and a nominal or waived recordkeeping fee.

"When we sit down with a company and disclose their plan’s revenue flow and cost basis, we see the outrage factor," Mr. Glading said.

Mutual fund investors have paid sky-high fees for far too long. Let the negotiations begin.