By Ian Salisbury
The jury is still out on Washington’s big effort to wring costs out of America’s 401(k) system by making the industry disclose those costs more clearly. But a wave of recent price cuts by big-name mutual fund companies suggests that the new reform efforts are gaining traction.
In recent months, MFS, Putnam, John Hancock, Janus and Columbia separately began offering cheaper versions of many of their funds to use in retirement plans. For example, MFS now offers a retirement-plan share class of its $21 billion MFS Value (MEIKX) fund, which costs investors $60 a year for every $10,000 invested. That’s in addition to the company’s four other retirement share classes that charge anywhere from $69 to $169. Likewise, new share classes for the $4.5 billion Putnam Fund for Growth & Income (PGREX) charge as little as $58 a year per $10,000, compared with $137 for its other retirement shares.
Across the market, the average annual fee paid by investors in active stocks funds last year was $93 per $10,000 invested, according to the Investment Company Institute.
While investors won’t all realize such eye-popping savings — 401(k)s are a bit more complicated than that — the changes are good news for retirement savers, according to Ryan Mullen, head of the defined contribution investments business at MFS. “Ultimately, this is going to mean lower fees,” he says.
Experts say the moves, previously reported by the trade journal Ignites, are a response to the Labor Department’s effort to squeeze waste from retirement plans by requiring plan providers to give employers much more information about who pays what.
A key concern for regulators are pricier mutual fund share classes that collect money from investors not just for picking stocks but also to defray other plan costs like keeping track of account balances, mailing out statements, and even paying the stockbrokers that helped design the plans. To be sure, these gold-plated versions will still remain available to employers that prefer them. And because the new cheap versions are bare bones, some plans that adopt them may need to slap participants with separate administrative fees to make up for some of the lost revenue.
Nonetheless, touting the potential of the low-cost shares is something of a departure for Wall Street. Last year, when the Investment Company Institute, the fund industry’s powerful trade group, published a major study of retirement plans, it emphasized plan size and account balances as “primary drivers” of costs — and didn’t examine whether fee structures might inflate what investors pay.
On Monday, a spokesman for the institute said, “Long experience in the mutual fund industry shows that disclosure fosters competition and competition drives down fees, to the benefit of investors.”
One way the new low-priced share classes are likely reduce overall fees is simply by focusing employers’ attention more closely on what they are asking their employees to pay, experts say.
That’s especially true when small companies grow into large ones, according to Peter Whitman, head of Putnam’s defined contribution investment only group.
Because of economies of scale, workers at small employers tend to pay more — a fact of life. In the past, however, fast-growing companies haven’t necessarily been aggressive about grabbing the discounts that their greater size entitles them to. For those companies, in particular, the emergence of lower share classes could still have a significant impact. “It’s more transparent,” Whitman says. “It lowers expenses.”