Why 401(k) Fees are Not the Primary Issue

A pair of university professors have once again tried to prove that the reason people get poor results in their 401(k) plans is because of high fees.  This is a perennial subject and will generate a lot of discussion without helping anyone.

The primary factors that determine how much money there is in a 401(k) plan at retirement are

• How much money employees put into the plan
• Whether the company provides a matching contribution
• How well the money is invested

The fact is that people put too little into these plans, many employers do not put in a company match, and employees don’t know how to create an effective portfolio from the choices that are available.

Not knowing how best to invest the 401(k) is not the employees’ fault.  They are not investment professionals.  Information about the investment choices is limited.  Most people don’t have the time or inclination to do the research.  That is why we are beginning an initiative to help people who want to make intelligent choices in their 401(k) plan do a better job.

The focus on fees reminds us of the old story about a man who lost his car keys at night and kept searching for them under a street light because that’s where the light was better.  Fees are easy to measure while investor behavior is harder to quantify.  That’s why the fee focus is so misplaced.

Of course, all things being equal, low-cost funds are better than the same fund that charge higher fees.  In our business, we try to invest in the lowest cost class of funds that we wish to use.  But the focus on expenses can actually backfire.  For example, most foreign funds have higher fees than domestic funds.  Yet a properly diversified portfolio should be exposed to foreign markets.  If the investor is persuaded to invest in the funds with the lowest expenses he may forgo investing in the markets  that may make him the most money.

Free advice is usually worth what you pay for it.  In many cases it can be misleading.