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Exclusive Interview: David Huntley Explains Fees Just One Component of Value

May 19
00:21 2015

Readers may have been first introduced to the 401k Averages Book several years ago when FiduciaryNews.com offered a review of it. You can read that review here: “Great Info for Every 401k Plan Sponsor: Review of 401k Averages Book,” Dave Huntley_300(FiduciaryNews.com, April 26, 2011). We’ve since had plenty of occasions to quote Joseph Valletta, one of the two editors of the book. This time, we figured to give his co-editor, David Huntley, a chance at the bully pulpit.

Published since 1995, the 401k Averages Book is the oldest, most recognized source for non-biased, comparative 401k average cost information. It is designed to provide financial services professionals and plan sponsors with essential comparative cost information needed to determine if their plan costs are above or below average. The easy to read format allows users to quickly identify the appropriate average and compare investment, recordkeeping, trustee and total plan costs.

FN: Dave, our readers enjoy hearing a bit about the background of those we interview. What experiences eventually led you to publishing 401k Averages Book?
Huntley: In 1992 we were looking for a database of 401k vendors to help us with a project we were performing for a client’s plan. There wasn’t one so we built one. After we built it we thought we would see if anyone else might want it. They did and we printed and sold the first edition of the 401k Provider Directory. A few years later we were asked to do a benchmarking project so we averaged the fees of the vendors in the directory based on plan size then asked if anyone else thought it would be useful. They did, the 401k Averages Book was born and here we are fifteen editions later.

FN: The book is now in its 15th edition. What do you see as the most dramatic change in the 401k industry since you began publishing the book?
Huntley: Can I name three?

  1.  401k plans have gone from supplemental savings plans to primary retirement plan savings vehicles
  2. Target Date Funds have gone from good idea to a majority of the flow in many plans.
  3. Fee Transparency has gone from opaque to clear.

FN: We’ve noticed the book’s FAQ does a great job of answering important practical questions. One item left undefined, though, is your definition of “trustee.” Is this limited to a bank trustee (or, in some cases, individual independent trustees assigned to monitor the plan) or would this also include fiduciary advisers? If the former, are fiduciary advisers included in the “investment” category?
Huntley: We limit our definition to bank trustees exclusively.  There are some products in some scenarios that have a 3(38) service associated with them. Many of the products in most of the scenarios include the use of an adviser acting in a 3(21) capacity. The fees charged for those types of service would be found in the investment category.

FN: How has the DOL’s various fee disclosure rules impacted the fees you’ve been tracking? Why do you think that is so?
Huntley: Fees are now transparent.  That was not the case in the 90’s. I think the DOL has done an excellent job providing leadership in this area.

FN: The DOL is now targeting “conflict-of-interest” fees (i.e., 12b-1, revenue sharing, commission, and other brokerage fees). Your data contains these fees, but they are lumped together in the broader category of investments. In general, have you seen these fees going down over the past few years? In response the DOL’s proposed new rule, how do you expect future editions of 401k Averages Book to segment out and isolate each of these “conflict-of-interest” fees like you’re currently doing for revenue sharing?
Huntley: We have broken out revenue sharing – which includes 12b-1 and commission – in our last three editions and continue to do so in the 15th edition. We will be responsive to our subscriber feedback and suggestions to further isolate revenue sharing fees.

FN: As a follow-up, since your data reflects information obtained from providers concerning their products to calculate an average participant fee, how do you account for the different market share each provider/product might have in the 401k market?
Huntley: We do not weight fees by market share.  Each product has equal weight in the scenario they are factored in.

FN: Returning to the DOL’s 2012 Fee Disclosure Rule, there was an initial concern, in Fred Reish’s words, there would be a “race to the bottom” regarding fees. Recognizing the problem with this, the DOL specifically said the issue is not the size of the fee, but the relative value of the fee. In your experience, how might a plan sponsor best benchmark “value derived” from the service rendered? How might this be reflected in a future edition of 401k Averages Book?
Huntley: Price (fees) are a component of value. There are many other components that make up value and the relative weight will vary from plan to plan. We think a plan sponsor will want to measure those factors quantitatively and/or qualitatively, weight them, and determine the value propositions they have with their vendors.  We used to include a services worksheet in our past editions. Perhaps we will look to add an improved version of the worksheet in future editions.

FN: There appears to be a growing trend to isolate fees by service provider. You’ve already done this to some extent with your splitting out the “recordkeeping administration” and “trustee services” functions. Logistically, what are the ramifications of narrowing down the fee analysis more specifically? For example, including separate categories for fiduciary adviser, broker, custodian, recordkeeper, 5500 filing service, and other service providers?
Huntley: We have always taken subscriber feedback and suggestions very seriously. Most of the improvements we have made to the book are because of our subscribers. We are looking at ways to isolate fees by service provider while not losing site of the forest for the trees.

FN: Since the SEC differentiates between “fees” and “expenses” in mutual fund prospectuses, and since “fees” do not add value to potential investment returns and “expenses” do (with the exception of the 12b-1 and revenue sharing fees, which the SEC currently allows to be categorized as an expense), how do you see future editions of 401k Averages Book helping plan sponsors (and maybe even nudging the SEC), to better clarify both the difference between “fees” and “expenses” and their relative relevance to benchmarking efforts (i.e., how each might be benchmarked in a different way)?
Huntley: The last three editions of the 401k Averages Book have an entire section dedicated to differentiating investment expense and revenue sharing. Our subscribers thought it was important so we continue to deliver it. We have had excellent feedback on that section and as we get requests to further isolate revenue sharing fees by type of service provider we will make every attempt to do so.

FN: Dave, thanks for you great answers and keep up the great work with your book!

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About Author

Christopher Carosa, CTFA

Christopher Carosa, CTFA

2 Comments

  1. Mark Zoril
    Mark Zoril May 20, 16:16

    Maybe it is just me, but not sure that I would characterize fee transparency as clean yet. With some of the plan sponsors I interact with, their fee disclosure statements are still more convoluted than they need to me.

  2. Christopher Carosa, CTFA
    Christopher Carosa, CTFA Author May 20, 16:29

    Yes, Mark, you may have a point. You’re not the only one I’ve heard that from.

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