This is the first in a series of posts about the problem of excess fees charged to defined contribution retirement plans, a subject I’ve been researching with Quinn Curtis. Our findings about the pervasiveness of excess fees spurred me to reassess my own retirement investments. I was embarrassed to find that, among other things, my old Stanford University 401k was invested in “CREF Stock Account,” which uses a combination of “active management, enhanced indexing and pure indexing” and charges 49 basis points (.49%) as its “Estimated Expense Charge.” Now 49 basis points is not an outrageously high fee, but it is substantially higher than the fees charged by a low-cost index.
So I called TIAA-CREF and asked for help in rolling over my Stanford account to a Fidelity IRA. The TIAA CREF rollover specialist asked why I wanted a rollover, we had the follow brief exchange:
IAN: Because the fees on my CREF account are too high.
TIAA-CREF advisor: Well, if you care about costs, you don’t want to rollover to Fidelity.
Frankly, I was shocked by this representation. I think of TIAA-CREF as a reputable organization that has provided valuable services to legions of the professoriate. But the implicature that Fidelity funds charge higher fees than TIAA-CREF is misleading. I asked the adviser how much he thought Fidelity indexes charge and he said he didn’t know but was willing to look it up for me. After a pause he reported accurately that Fidelity offers index ETFs with “net expense ratios” of just 7 basis points – one seventh the cost of my current Stanford investment.
I want to be clear that I don’t think that the adviser intentionally tried to mislead me when he suggested that Fidelity has higher expenses, but even negligently misleading participants about the relative costs of different investments is legally troubling.
After the adviser discovered that Fidelity in fact offers much lower costs index ETFs, he next offered that it wasn’t really a fair apples-to-apples comparison because the CREF fund was actively managed. To which I replied that, for my Stanford plan, TIAA-CREF doesn’t offer any index options. Failure to offer an option is a good justification for charging higher fees.