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Wednesday, August 10, 2016
Fees & Your 403(b) Retirement Plan
After my last post on fees, you may be wondering about the feel levels in your defined-contribution retirement accounts. Many faculty no longer receive defined-benefit pension plans. Instead, universities and faculty contribute to a retirement account under the partial control of the faculty member. I say partial control because most 403(b) retirement plans only allow faculty to pick from a limited menu of options. Many people struggle to make optimal choices in this context for a variety of reasons, including, poor plan options, lack of expertise, an inability to invest elsewhere, and other reasons.
The New York Times has an article discussing a new lawsuit over fees in academic retirement plans. The suit alleges that faculty at M.I.T., N.Y.U., and Yale paid excessive fees because their universities failed to monitor the fees extracted from their defined-contribution retirement plans:
The complaints allege that the universities, as the plan sponsors, failed to monitor excessive fees paid to administer the plans and did not replace more expensive, poor-performing investments with cheaper ones. Had the plans eliminated their long lists of investment options and used their bargaining power to cut costs, the complaints argue, participants could have collectively saved tens of millions of dollars.
Some thoughts on what faculty might do to limit problems after the jump.
If you don't know how much you're paying in fees for your retirement plan, you're not alone. An AARP survey found that 74% of retirement plan participants don't know how much they pay. So, how much is too much? Larger plans can generally achieve lower fees. Plans with $500 million or more in assets average about .37% in fees. If your fees are high for the size of your plan, the Wall Street Journal has advice for lobbying internally for a change to achieve lower fees. You might also want to quietly point out that switching to a more efficient plan could reduce the university's litigation risk.
Posted by Benjamin P. Edwards on August 10, 2016 at 11:54 AM | Permalink
Comments
May I suggest that the universities review Boeing's litigation experience with 401(k) fees (November 2015).
Posted by: Paul | Aug 11, 2016 10:17:50 AM
In a former life I spoke at pension fund conferences to trustees. The most important point that I could make was this: the simplest way to increase risk-adjusted return is to reduce expenses. While defined benefit plans obsess over the high fees paid to hedge fund managers (with hedge funds making up a very small portion of assets under management), they ignore the fees paid for "garden variety" investments, and in many cases have structured their portfolios and managers selection process to guarantee they will pay higher fees than necessary. My experience tells me this is also true of universities and 403(b) plans. Each year many universities send out letters to faculty enumerating the new fund choices that have been added or removed. But the most obvious criterion for selection of fund choices - low management fees - is often not the primary consideration. Individual faculty should pay more attention, both to their own choices and possibly by getting involved in their school's choices.
Posted by: Howard Katz | Aug 11, 2016 9:44:50 AM
I really want to see Vanguard let into this game--I would pick a retirement account with them in a heartbeat. It is just too easy to pick a sluggish fund with high fees through the others.
Posted by: Margaret Ryznar | Aug 10, 2016 5:36:08 PM
BDG, you're absolutely right. There are a lot of reasons why people end up under-saving and poorly allocating assets. I've updated the post to link to Ayres & Curtis. Hopefully we'll see a continued move to lower-fee plans.
Posted by: Ben | Aug 10, 2016 4:56:51 PM
Not to make this an argument about Jacob's article, but expertise is only a tiny piece of the issue in retirement savings. Several economists in renowned institutions have outed their colleagues as bad retirement planners. My read of the evidence is that under-savings is a problem of attention, time discounting, and combinations thereof (e.g., allocating attention is not prioritized because the rewards are too distant). Ian Ayres & Quinn Curtis also have a nice piece on the impact of choice paralysis and its implications for plan design. Indeed, the allegations in the complaint that the plans offered *too many* options seem to rest directly on the Ayres & Curtis work.
All of this is to say that I think it is nice to offer people advice, but unrealistic to expect them to follow it. That's the whole point of the lawsuit! What people who care about these issues should do is work with their personnel offices and university counsel (and, where applicable, the faculty union) to craft retirement plans that reflect our best scientific understanding of how people decide.
Posted by: BDG | Aug 10, 2016 4:33:54 PM
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