401(k) Fee Critics Overstate Problem, ICI Chairman Says

While supporting improved retirement plan fee disclosure, the head of the Investment Company Institute said Wednesday, May 6, that congressional criticism of 401(k) plan fees has been inflated by critics.

“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, Web sites, 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-California, would require more disclosures of 401(k) fees.

In response to charges that plan fees are too high, Murphy cited a recent ICI-sponsored survey which showed that total fees for the plans were 0.72 percent of assets, “quite a bargain compared to the 3 percent 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,” Murphy said.

Because the mutual fund industry manages half the assets of U.S. defined-contribution and individual retirement accounts, it has “a duty to speak out in defense of America’s private, employer-based retirement system,” said Murphy, who is also chairman of New York-based OppenheimerFunds Inc.

The fund industry wants to make it easier for employers to offer retirement plans and easier for workers to save even if they don’t have a plan, he said, noting that automatic enrollment and auto escalation, which increase participant contributions as their salary rises, should be considered.

The $10 trillion mutual fund industry, which manages the retirement savings of 46 million U.S. households in defined-contribution plans and IRAs, “has a large stake in ensuring that policymakers understand the workings and the importance of today’s savings vehicles,” Murphy said in the opening session of the meeting.

He cited an ICI survey of 3,000 households conducted last fall that showed strong support for keeping tax breaks for defined-contribution plans and IRAs, as well as strong opposition to barring people from making their own investment decisions in the plans.

Murphy also called for adoption of money market reforms suggested in an ICI report issued last year after the Reserve Primary Fund from New York’s Reserve Management Co. Inc. “broke the buck.”

He called on the Securities and Exchange Commission to authorize money market fund boards to suspend redemptions of fund shares temporarily for funds facing spiraling redemptions, if the fund is unable to meet them, and a permanent suspension of redemptions for funds preparing to liquidate.

Reflecting the downturn throughout the financial services industry, attendance at the ICI annual meeting was about 40 percent below last year’s level, said Greg Ahearn, spokesman for the Washington-based association.

This year’s meeting “takes place against a very different backdrop than when we last met,” said William McNabb, president and chief executive of The Vanguard Group Inc. of Malvern, Pennsylvania. In light of the $2.4 trillion drop in assets last year, investors are questioning whether mutual funds are a sound way to save for retirement, he said.

“Our response has been one of steadfast commitment to our shareholders,” which sets the fund industry “apart from the rest of the troubled financial sector,” McNabb said.

Filed by Sara Hansard of Investment News, a sister publication of Workforce Management. To comment, e-mail editors@workforce.com.