ICI chairman: 401(k) investors shouldn’t dwell on fees

WASHINGTON — If policy-makers examining the 401(k) system focus only on fees, they will be doing investors a “disservice,” Investment Company Institute chairman Martin Flanagan said last Wednesday during his address at the Washington-based trade association’s 49th annual general-membership meeting here.
Too much scrutiny on fees could lead employers and workers to focus only on holding down total investment costs, said Mr. Flanagan, who also is president and chief executive of London-based Amvescap PLC.
“Six years ago, the low-fee [investment] option in Enron and WorldCom retirement plans was the company stock,” he said. “In hindsight, that option turned out to be a very costly choice for participants.”
Houston-based Enron Corp. and Clinton, Miss.-based WorldCom Inc. both ultimately filed for bankruptcy protection.
Even in less dramatic circumstances, the low-fee option isn’t always the best choice for investors, whose investment horizons can span 30, 40 or 50 years, Mr. Flanagan said.
“Money funds generally are less expensive than long-term-equity funds,” Mr. Flanagan said. “We know that both have their place as part of a well-diversified portfolio, but equity returns over time far outpace money funds.”

‘Good value’
In addition, ICI research shows that the fees mutual fund investors pay have fallen by 50% over the past 25 years, Mr. Flanagan said.
“Not only are investors paying less, the service that they’ve received has been greatly enhanced during that period,” he said. “Sounds like a pretty good value.”
John C. Bogle, founder of The Vanguard Group Inc. of Malvern, Pa., and a longtime advocate for low fees, said that while it is never good to focus exclusively on anything, fees should be the “first thing” on any investor’s agenda.
“We know that the more the managers make, the less investors make. It’s not complicated,” said Mr. Bogle, who was seated in the audience. “But you don’t expect a lot of people here to say it, because a lot of people here have a great vested interest in high fees.”
Mr. Bogle also questioned the ICI fee research.
“The idea that there’s any rational statistical study that shows that mutual fund fees have dropped by 50% in the last 20 years or whatever he said is a pipe dream,” Mr. Bogle said. “You have to have one of the great statistical masseurs to get down there.”
In 1980, mutual funds held about 3% of the financial assets of American households, Mr. Flanagan said. That figure has risen to almost 25%, he said.
“For the individual investor, mutual funds are more important than ever before,” Mr. Flanagan said. “But with that in mind, I think we all would recognize that our leadership, and our fiduciary role in our industry, comes under scrutiny.”
Today, 401(k)s hold $2.7 trillion in assets. The success of the 401(k), which marked its 25th anniversary last year, also has drawn scrutiny, Mr. Flanagan said.
Flexible and innovative, 401(k) plans also can be complex, he said.
“If we just think of who provides services to these plans, investment managers, record keepers, consultants, transfer agents — there’s a lot of moving parts,” Mr. Flanagan said.
He said that with all those service relationships, policymakers want two questions answered: What are participants and sponsors getting for their money, and can they understand what they are paying for?
“These are very important issues, and we applaud Congress and the Department of Labor and the [Securities and Exchange Commission] for taking them on,” Mr. Flanagan said.
More disclosure
Investors in 401(k)s deserve better disclosure, and the fund industry is working to help them get it, he said.
The ICI has asked the SEC to require that all buyers of mutual funds — whether in a defined contribution plan or not — receive a brief summary of fees and expenses, risks, historical performance and investment objectives, and be told the fund adviser’s identity.
The 401(k) is so important to America’s retirement future “that we as a nation cannot afford to leave questions about fees and disclosure hanging over us,” Mr. Flanagan said.
“Mutual funds hold roughly half the assets of 401(k)s and [individual retirement accounts], so as you might expect, when Washington turns its focus to 401(k)s, the gaze goes toward mutual funds,” he said.
Still, 401(k)s aren’t just about mutual funds, Mr. Flanagan said.
“The remaining half of the assets are invested in other vehicles — company stock, guaranteed investment contracts, separately managed accounts, commingled funds, and the list goes on,” he said.
But no matter what the investment option, workers and sponsors need the same clear and transparent information, Mr. Flanagan said.
“We are working with the Department of Labor, the SEC and Congress to make our point very clear,” he said.

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