The Department of Labor has come up with a new proposal that 401(k) retirement plans should only be evaluated on the basis of fees and other charges. The computerized advice models will not factor in the history and performance of these funds.
This proposal has drawn criticism from some people in the mutual fund industry, as it will negatively affect actively managed funds, and index funds will emerge as clear winners. It has been argued that this new method ignores quality and only looks at the price.
However, this criticism might not be valid as in case of retirement plans, price is often a very important criterion for investors. That is, a retirement plan that costs lesser is usually considered better than a plan that costs more. Moreover, the performance of actively managed mutual funds has been criticized by many experts. Most of the mutual funds do not meet the performance of the benchmark index due to bad management and high costs.
Another argument in support of the new proposal is that the past performance of a fund has never been a good indicator of future performance. The performance of mutual funds has been going down in the past few years. Data shows that there are many mutual funds that had been performing well in the past but have given poor returns recently. Therefore, it might be better to ignore performance history while looking at investment options for retirement plans so that investors are not misled.
Another advantage of the new evaluation method is that it will eliminate a much criticized practice of mutual funds in which they return a part of the fees to record keepers and advisers for being made a part of the investment options in the plan. The new method would lead to lesser revenue sharing and will marginally increase the costs for plan sponsors. However, even if the record keeping costs increase, lesser brokerage and better performance of funds would result in overall benefits for investors as well as sponsors.
Actively managed funds are often deceptive and do not perform as well as they claim. It is therefore a good idea to concentrate on fees, charges, and other costs while deciding investment options for 401(k) retirement plans. With lesser costs, the net returns would also improve for the amount that an employee puts into the plan. That is the reason why many financial experts have supported the proposal.
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