By Susan Kelly
The average expense ratio for target-date retirement funds was a relatively steep 1.29% at the end of 2006, according to the latest data from Morningstar Inc., Chicago.
That compares with an average expense ratio on 401(k) investments of 0.75%, according to a survey by Deloitte Consulting LLP, New York. Given the current focus on 401(k) fees — including class-action lawsuits recently filed against 12 large companies — and the impact fees can have on workers' retirement savings, the cost of target-date funds could become an issue for retirement plan executives.
Cost concerns already are encouraging more companies with large 401(k) plans to build their own target-date funds rather than buy them. "If you're a large plan sponsor and you've managed to negotiate down to a very reasonable or even a very low cost with your existing managers, it makes a lot of sense to build target-date funds out of your existing lineup," said Lori Lucas, defined contribution practice leader at investment consultant Callan Associates, San Francisco.
A Callan survey of almost 80 companies with defined contribution plans shows that 78% use target-date or target-risk funds, and of those, 29% built them using the core fund options already in their plans. The survey, which has not yet been released, was conducted in the second half of 2006.
A few years ago, Intel, the Santa Clara, Calif.-based semiconductor company, built a set of five target-date funds for its $4 billion 401(k) plan, using the plan's five core funds. Stuart Odell, director of retirement investments, noted the cost of Intel's target-date funds is 0.10% to 0.12% (less than a tenth of the latest average expense ratio cited by Morningstar).
Consultants say target-date funds could become the dominant investment in defined contribution plans. At the end of 2006, there were 209 target-date funds, up from 45 at the end of 2002.