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Bidding War Coming in 401(k) Industry?

While the tone and tenor of the “love letters” from Yale Law School Prof. Ian Ayres caused the retirement industry to question the letters’ effectiveness and Ayres’ intent, Kathleen McBride of FiduciaryPath tackles the question of why there is such disparity in the fees paid by similarly situated DC plans.

Whether the industry likes it or not, fees will continue to be front and center as a result of the Yale letters and media scrutiny on the effect of fees, as well as increased regulatory scrutiny. Most experts agree that fees will continue to decline for many service providers, including advisors, but they’re also concerned about the effect on the quantity and quality of services offered.

John Rekenthaler of Morningstar notes it took years for mutual fund investors to get a handle on fees, and that DC plan fiduciaries are going to take even longer because fees are harder to determine. While benchmarking services are useful, Ed Lynch, a noted plan advisor, says that he gets different results depending on which service he uses — which is why he recommends RFPs or RFIs.

For its part, the DOL has clearly stated that a fiduciaries must act solely in the best interests of participants when selecting funds, ensure that fees are reasonable, and document the decision making process.

Are most DC plans ready for the spotlight that they’re sure to receive as we move from a DB to a DC world? The answer might be yes for plans serviced by really good advisors and providers that have been rebid in the past three to five years. But what about the estimated 65% of advisor plans using a less-than-experienced advisor, or plans using a provider without sufficient scale? That question is appropriate even for plans with good advisors and healthy providers that are operating under a fee schedule that’s outdated.

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