Episode 4: Retirement Plans Then and Now – Fees

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Hello and welcome to Revamping Retirementment, a podcast brought to you by Cammack Retirement Group, where we tackle the retirement plan related issues, plaguing fiduciaries and plan sponsors. Our host Mike Webb has more than 25 years of experience in the retirement plan industry and is a nationally recognized subject matter expert. We hope you enjoy Revamping Retirementment.

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Thanks, Karen once again our wonderful producer Karen McCauley with that introduction uh… as Karen indicated Mike Webb is my name and the Revamping Retirementment Podcast is my game and let’s get right to it uh… we’re gonna take a little trip down memory lane as we’ve been doing with the past couple of podcasts when it include that trip on this month uh… back in nineteen ninety one when i first started working uh… for Cammack Retirement Group that yet that’s

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over 27 years ago now. know that’s a long time for a lot of you but back then things were very different in retirement plans and we’ve been learning in our last few podcasts a lot of valuable lessons for plan sponsors about the sea change in retirement plans that has occurred from just 27 years ago not even my entire working career of course. Back then things in terms of design

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and technology and uh… investments were very very different. We covered those in our last couple of podcasts. So get a clue uh… that series this month uh… with a discussion of probably the one thing that has changed the most uh… since nineteen eighty one and that is. But before we dive into fees uh… we’re gonna get to our trivia question for this month as we always do and will give you the answer to the podcast but here is the question uh… it’s a few days question shocker, shocker

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from the Investment Company Institute back in 1991 according to their data, the average expense ratio for an equity mutual fund, hold onto your hats, was 198 basis points. That’s $1.98 for every $100. Yeah, hard to believe, but that was the average back in 1991. The question is, what is the average equity?

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mutual fund expense ratio today as measured by the most recent ICI report which was just released for 2018. We will give you that answer and I know you’re waiting for it at the end of the podcast but first let’s dive right in to our discussion of the differences in fees and really a night and day situation with fees since 1991. I can remember back in 1991 that pretty much outside of printed prospectuses, remember those?

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We still have them, but they’re given as electronic form mostly nowadays. And some vendor materials, and very few vendor materials by the way, that were about as clear as mud. There was very little in the way of details about investment fees, whether it be variable annuities, fixed annuities, or mutual funds. In fact with fixed annuities, there was no fee disclosure at all. mean, you could not, you needed a good detective to figure out what the cost.

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of a fixed annuity in your retirement plan was. Less so for variable annuity mutual fund fees, but still it was difficult to find out exactly what the cost was. Today that’s changed rather dramatically. Pretty much with the click of a mouse or tap of a phone, keypad, or smartphone, you can get just about, just about, we’ll talk about some exceptions, any

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any detail in terms of uh… it expenses like expense ratios investment fees uh… and the like uh… and and even fixed annuities nowadays uh… plan sponsors maybe not so much of a part of the global plan sponsors can certainly uh… get uh… get fee disclosure and and find out what they’re paying respect to fix the news so that big big change uh… another big change was uh… record-keeping

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and advisory fees. 1991 they were largely a mystery. Plan sponsors really had no information about what their record keeper was paying. In some cases they had information about their advisory fees. We were fairly state-of-the-art in that area in terms of disclosure, but a lot of that was in the dark as well. The fees were just buried deep within what we call a bundled

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of investment and services product uh… they did they just didn’t they put everything together and it was kinda one thing you couldn’t figure out what you’re paying for keeping what you’re paying for advisory what you’re paying for everything else it just didn’t exist now today uh… there are exceptions to the rule that the K–12 public and 403(b) still operates very much the way it did nineteen ninety one will talk a little bit about that later uh… but almost all the markets such fees are very clearly disclosed now

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You can find out exactly what your record-keeping fee is, exactly what your advisory fee is, no issues. Other changes. 1991, revenue sharing. mean, people knew what it was vaguely, the term revenue sharing, but the actual amounts were largely a mystery. They pretty much were known by the record keepers and the service providers who benefited from such arrangements. Pretty much no one else knew about revenue sharing. They were completely left in dark.

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Again, fast forward to now, such arrangements are fully disclosed and many plan sponsors actually use that information to try to reduce or even eliminate revenue sharing. So that of course is a good thing. Back in 1991, like, concepts we take for granted today like fee levelization, trying to have all participants pay the same fee, flat hour per head pricing, which some plan sponsors strive for, they would have been nonsense.

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Nice in theory, but they were gobbledygook. Even if they existed, which they didn’t really in retirement plans, but even if they existed, mean, plan sponsors didn’t know the amount of fees that they that could be levelized or possibly charged on a flat-dial basis. So how could they possibly evaluate field levelization or flat-dial pricing? Well, they didn’t even know what they were paying. It was insane. Now such pricing features are increasingly common in retirement plans, again, because people are just

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plan sponsors and, to an extent, participants know what they’re paying. So that’s good. Speaking of participants, in 1991, just about every participant that I came across anecdotally and surveys would back this up thought their retirement plan was free. They didn’t think they paid a dime for their retirement plan because it wasn’t there was no disclosure on their statements. There was no disclosure anywhere. So they thought the fee the wonderful retirement plan services they were getting were absolutely free.

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Some people still believe that, believe it or not, even in today’s world. But with things like mandatory fee disclosures and the technology now disclosing fees, I think that’s educated a lot of the participants that there are indeed costs to operate the retirement plans and guess who’s paying them? For the most part, the participants. So that’s another, again, these are lot of big positive changes. Back in 1991,

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uh… retirement plan advisors were primarily brokers uh… uh… we want to know in the cutting edge in the nineties uh… firms that was an RIA — a registered investment advisor uh… but that was unusual uh… most most places with brokers and the primary way they got paid was commissions uh… depending on the amount of assets under management uh… now it’s it’s almost looked full three hundred sixty degrees uh… registered investment advisors

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most of whom charge a flat fee for services, dominate the marketplace, especially the large, particularly the large plant marketplace. So we talked about what’s changed, what’s stayed the same. Well, revenue sharing still exists, much to my personal chagrin. I’m not a big, not a huge fan of revenue sharing as you’ve probably seen from my many top articles on this subject. It pretty much exists as it did in 1991.

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It still greatly impacts fee transparency and the reason for that is it’s hard to understand. Not only for plan sponsors but try explaining revenue sharing to a participant. It’s probably the equivalent of banging your head against the wall because you’ll be more productive in that endeavor than trying to explain the complexities of revenue sharing to a participant. It’d be nice if revenue sharing went away but it’s still here just as it was.

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in 1991. a lot of ways the problem is even worse because the revenue sharing options have gotten so varied because there’s so many more share classes of funds. I remember back in the day if you had five different share classes of funds it was a lot. Now you have 15 shared classes of one fund all with different revenue sharing and then there’s nuances such as the fact that the fund with zero revenue sharing is not always the cheapest fund which is a game that the

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what the fund managers play and that that makes things even more confusing because you would think zero urban sharing means the lowest cost but it’s often not the lowest, you know, the net cost. So it’s really, really not a great thing that we still have those issues. And then we talked about some of the market segments really haven’t evolved. mean, the higher ed segment, the corporate segments, healthcare, general nonprofits.

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All of them are pretty much evolved so that a lot of the changes we talked about have been great and great for the plan sponsors and participants. But there are some market segments like public K–12 where it’s the same old, old. I mean, you look at some of the products, they haven’t really changed since 1991. And some of the fees, they haven’t really changed since 1991. you really have to, those particular marketplaces, I feel for them, that’s a difficult situation. So what are the lessons learned here for plan sponsors? Well,

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things have changed unbelievably in last 27 years and things are going to change unbelievably in the next 27 years. the way fees are evolving is almost like a computer where you buy a computer and it’s outdated in a certain amount of time. Same thing with fees. You really need to be on the cutting edge. You large plan sponsors really need to look into flat dollar pricing. You should have already done some sort of fee levelization. You should also look to eliminate revenue sharing. Sometimes that’s not possible.

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with some large variable new contract still in place as we talked about the concept of participant directed contracts and 403(b) plans so for you sponsors you know you can only minimize it but not eliminate it but going forward you do your best to to get rid of revenue sharing and you know staying on the cutting edge means that you’re gonna stay you’re staying up to date because if you’re not on the cutting edge you’re not going to be up to date because it’s just a rapidly evolving market

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So that that about wraps it up as I see by the our timer for this This month’s podcast — remember, your trivia question answer to our trivia question 198 basis points back in 1991 Wow, the average equity mutual fund a fee, know what that was the most recent ICI survey 55 basis points, so it’s gone down Tremendously more than you know more than three, you know

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more it’s a third of what it was back in uh… the third of what it was back in uh… made a one and uh… what’s it going to be in the next twenty seven years i don’t have the answer that but expect to be a lot lower uh… for terrible collie uh… our entire production team uh… here at Cammack Retirement Group my name is mike webb and this has been Revamping Retirement.

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The content in this podcast is for institutional investors and plan sponsors. The information is intended to be educational and is not tailored to the investment needs of any specific investor. All examples of investor gains and losses are hypothetical and intended to illustrate the importance of early saving and consistent retirement contributions over time. Investment decisions should be based on an individual’s own goals, time horizon, and risk tolerance. Nothing in this content should be considered as legal or tax advice, and listeners are encouraged to consult their own lawyer.

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accountant or other advisor before making any financial decision. Thank you for listening to Revamping Retirement.