| BUSINESSWEEK ONLINE : NOVEMBER 1, 1999 ISSUE | ||||||||
| ||||||||
 | ||||||||
| FINANCE
The New 401(k) Bonanza: Lower Fees Plan sponsors are rushing to shave expenses. For investors, that can add up fast Small changes in large numbers can deliver a big punch. Just look at the $1.5 trillion now in 401(k) plans. If the companies that sponsor those plans could knock one-tenth of 1% a year off the cost of running the plan, they would save employees $150 million a year. In a raging bull market, with 401(k) participants earning in excess of 20% a year tax-deferred, who cares about tenths of a percent? But with the prospect of less generous returns ahead, those tenths start to look a whole lot more significant. Companies are looking to cut expenses and pass the savings on to investors. They are beginning to replace mutual funds with lower-cost do-alikes. Some large companies--Bell Atlantic (BEL), Xerox (XRX), and Novartis (NVTSY), among others--are saving millions by merging the investment management of the traditional defined-benefit plan with that of the 401(k) plan. Even Fidelity Investments, which usually caters to large companies, recently launched an Internet-based ''e401k,'' aiming to deliver many of the features of a big-company plan to firms with as few as 20 employees. Small companies are usually saddled with the highest costs. Cheering on the effort is the Labor Dept.'s Pension & Welfare Benefits Administration (PBWA), which two years ago held hearings into what it considered to be excessive 401(k) costs. ''We're pleased that people are paying attention to the impact that fees can have on retirement accounts,'' says Alan Lebowitz, deputy assistant secretary for the PWBA. The Labor Dept. unit has so far backed off from regulatory remedies, preferring to let the marketplace drive costs lower. Cerulli Associates Inc., a Boston consulting firm, estimates that for plans with more than 5,000 participants, overall 401(k) expenses have fallen from 1.26% in 1995 to 1.10% in 1998, and they're still heading south. Don't underestimate the power of knocking even a tenth of a percent off your 401(k) expenses. That saves $500 a year on an account with $500,000 balance. But in a retirement plan, the real value of cost-cutting is much greater. If that $500 remains invested in a Standard & Poor's 500-stock index fund earning an average return, it would grow to nearly $6,800 over the next 25 years. And that is just for one year's savings. The drive to lower expenses takes dead aim at investment management fees, which account for 80% to 85% of the cost of running a 401(k) plan. Administrative expenses like recordkeeping, account servicing, and participant communications make up the rest. In the range of 401(k) investment choices, the ''retail'' mutual funds--the name-brand funds that are often advertised and whose prices are in the papers every day--are the most popular, accounting for about one-third of 401(k) assets. They are also the most costly. For a large-cap equity fund, a mainstay of the 401(k) plan, the average expense ratio is a steep 1.22% a year, and small-cap and foreign equity funds are even more expensive (table). CHEAPER PLAN. That's why ''institutional'' funds--which offer similar investments but lower expenses--are catching on with plan sponsors, says Peter Starr, a Cerulli Associates consultant. These funds may be designed especially for institutional investors, or in many cases, a separate share class of a retail fund that has lower fees. According to Cerulli's research, institutional funds have gone from 2% of 401(k) assets in 1996 to 6% last year, and that's expected to reach 13% by 2001. Says Starr: ''That's the best evidence that plan sponsors are paying attention to cost.'' That's not all. Commingled trust funds are also gaining ground. This sort of fund pools money from several employers and operates much like a mutual fund, but at a lower cost because it has far fewer shareholders and lower regulatory costs. (They are regulated by bank trust laws, not the Securities & Exchange Commission.) Nvest Companies LP, in fact, recently launched a family of trusts that mimic mutual funds run by Nvest mutual-fund managers such as Loomis Sayles, Kobrick, and Oakmark. Cheaper yet are the separately managed accounts, in which a 401(k) with at least $50 million to invest hires an investment manager to supervise that money. Unlike mutual funds, participants cannot find the price of these lower-cost vehicles in the newspaper. But plan sponsors are pricing them daily like mutual funds, posting returns on their intranet sites, and making them available through toll-free numbers. BETTER CONTROL. Some companies are finding savings by using one set of investment managers for all the retirement investing. ''We see it as one big mutual fund, and the defined-benefit plan is one shareholder along with the 401(k) plan participants,'' says Myra R. Drucker, chief investment officer for Xerox Corp. The savings are significant. The balanced fund that's 70% stocks and 30% bonds runs investment expenses of 0.38% and administrative expenses bring the total tab to just 0.49%. And Novartis Corp. Treasurer William McHugh figures merging the two investment programs saves about $3 million annually--''and we have better control over how the money's invested,'' says McHugh. Of course, the long-thought advantage in using branded mutual funds like Fidelity, Janus (KSU), and T. Rowe Price (TROW) is that people recognize the names. Thus, they might be more willing to invest in them, rather than in a no-name stock or balanced fund. ''Everyone is familiar with the 401(k), so I'm not sure it's worth paying for a brand-name fund today,'' says Richard K. Carnwath, vice-president and chairman of the investment committee for Vulcan Materials (VMC), a Birmingham (Ala.) construction materials company, which runs its private-label 401(k) fund for 0.3% a year. If Carnwath is right, the big mutual-fund companies will start feeling the heat. To keep the money, they'll have to lower fund fees or offer trust-fund alternatives. Either way, the 401(k) investor comes out the winner. By Jeffrey M. Laderman in New York _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ BACK TO TOP |
|  |
 | |
RELATED ITEMS The New 401(k) Bonanza: Lower Fees TABLE: Comparing 401(k) Expenses INTERACT E-Mail to Business Week Online | |||
