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Yale law professor again hammers high fees and revenue sharing. With a few reservations, I like what they have to say.

Greg Carpenter

December 29, 2022


Yale law professor Ian Ayres got hammered last year when he co-authored a paper attacking high cost 401(k) plans. Professor Ayres and Professor Curtis of UVA are back with a new article on 401k fees and practices. While I don’t agree with every point made in the paper, I do endorse their focus on fees and transparency.

Link: “Beyond Diversification: The Pervasive Problem of Excessive Fees and 'Dominated Funds' in 401k Plans

Industry groups have already criticized the profs’ work, citing outdated information. I think that criticism misses the larger points made by the authors.

Point #1 - Fees matter. In fact, fees matter more than most other considerations when putting together a 401(k) plan. I agree. The authors argue that fees above and beyond the cost of basic index funds must be factored into participant returns. Does the additional cost result in increased return? The authors say never. I don’t agree with that conclusion, but I do believe it is difficult to near impossible for plan sponsors to select actively managed investments that will beat net returns from index funds over decades of investment. Skilled financial advisors may be able to eke out an advantage using actively managed funds. Typical plan sponsors lack the time and experience to do so.

Point #2 – Revenue sharing distorts incentives for financial advisors and shifts costs to less sophisticated investors. The authors want it abolished. I agree it should be abolished, but for different reasons. Simply put, revenue sharing is the single biggest impediment to fee transparency in 401(k) plans, and is a much bigger issue in small business 401(k) plans, where revenue sharing investments are most often used. If all plan fees are presented on a level playing field, they will be easier to measure and compare.

What the paper gets right and wrong on small business 401(k) plans

I would add that this observation is true for even the smallest plans. Check out our fees and services and compare if you are skeptical.

What Ayres and Curtis get wrong is that smaller plans have higher fees. Quote: “…the highest fees are concentrated in the smallest plans.” I don’t see any analysis supporting this assertion and it seems to be taken as a statement of fact throughout the paper. While that seems to be a popular assertion in the financial media, it simply need not be true. The so-called economies of scale in larger plans are largely a myth.

Next post – the Frugal Fiduciary proposes a revised fiduciary standard to enhance the safe harbor provisions of Section 404c. Stay frugal!

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