“Miller said the issue is particularly important given that increasing numbers of American workers are relying on 401(k)s to help them pay for a decent retirement”, the release also stated.
Miller’s opening statement before the Committee requested a mandate for an index fund option plan choice. He articulated the virtues of index funds, stating, “Studies have shown that index funds outperform an overwhelming majority of actively managed, often higher cost funds.” Miller pressed not only for low-cost index funds options, but also education that would make investors more aware of the expected risks and returns that are associated with their investment options. He asserted. “To help workers better understand their investment options, the bill would require 401(k) plans to provide workers with key information on their options, such as historical risk, returns and fees.”
The need for employee education is dire. The evaporation of traditional pension plans forces many employees into a situation they do not understand. Under the pension paradigm, workers did not necessarily concern themselves with what their pension plans were invested in, or what their employers paid for those investments. Today, 401(k) plan investing requires that employees have the knowledge to make important decisions that will shape their financial futures.
Shedding light on the pervasive lack of investor education, the IFA chart below shows data revealed by Chairman Miller at the April 16, 2008 hearing. According to a July 2007 AARP study, only 17% of employees know how much they pay in fees and expenses in their 401(k) plans.
Further information revealed at the hearing shows that the lack of understanding about fees and expenses relating to 401(k) plans plays a devastating role in the long-term retirement savings of employees. The IFA chart below, assembled from material presented at the hearing, shows the extent to which excessive fees can delay workers’ retirements. Research from the Center for American Progress shows the additional months required to work in order to receive the same monthly income in retirement when fees exceed those of a benchmark index. The red bar on the right shows that a worker would have to work an additional 64 months – more than five years -- if they paid 2.0% in fees above the benchmark index.
The financial impact of high-cost vs. low-cost investments in retirement accounts is clearly set forth in the chart below which shows that investors who chose a high-cost option would, after 30 years, have a whopping 33% less than an investor who paid fees equal to fees charged by the average index fund!
The results of the studies go a long way toward explaining why the Committee has taken such a strong position in the advocacy of index funds investing:
- Low fees and expenses
- Historical risk and returns data
- Higher expected risk-optimized returns
The more investment education an individual gains, the more desirable an indexing strategy becomes. In its wisdom, the Committee extensively researched the 401(k) investing landscape. It listened to independent consultants to analyze the existing system and make recommendations to improve upon the retirement investing experience of potentially hundreds of millions of Americans. Their research brought them to advocate an investing path that they themselves enjoy — index funds.
John C. Bogle brought this realization to light in his most recent book, The Little Book of Common
Sense Investing:
“The simple index fund solution has been adopted as a cornerstone of investment strategy for many of the nation’s pension plans operated by our giant corporations and state and local governments. Indexing is also the prominent strategy for the largest of them all, the retirement plan for federal government employees, the Federal Thrift Savings Plan (TSP). The plan has been a remarkable success and now holds some $200 billion of assets for the benefit of our public servants and members of armed services”, Bogle states.
Index Funds Advisors is an expert in advising individuals, 401(k) plans and institutions on the benefits of risk-appropriate index investing. If you would like to learn how you can keep your fees low and earn risk-optimized returns, call to speak with an Investment Advisor Representative at 888-643-3133, or go to ifa.com and get started by taking the Risk Capacity Survey.