If Vanguard's Mutual Funds Aren't Cheap Enough For 401ks ...
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Friday, January 8, 2016

If Vanguard's Mutual Funds Aren't Cheap Enough For 401ks ...

If Vanguard's [profile] mutual funds aren't cheap enough for your 401(k) plan, whose mutual funds are?

Jerry Schlichter
Schlichter Bogard & Denton
Senior Partner
That shocking question stems from a new class-action lawsuit over a huge 401(k) plan. As reported by our sister publication, 401kWire, last week Schlichter, Bogard & Denton filed a complaint against health insurer Anthem over the $5.1-billion Anthem 401(k) plan. This time Jerry Schlichter, the class-action attorney now infamous for his 401(k) fee lawsuits against giant employers, is going after a Vanguard-run 401(k) plan that's largely filled with Vanguard mutual funds.

Some of the funds in question are indexed. Some of them were first offered in the plan in retail, not institutional, share classes. And Vanguard also offers separate accounts or collective trusts that follow the same strategies but for lower cost. If this big 401(k) plan sponsor isn't safe from 401(k) fee criticism even when it uses low-cost, Vanguard index mutual funds, which plan sponsor is safe using any kind of mutual fund? And if a shift happened in the largest plans, it could eventually trickle down to smaller plans for smaller employers.

Morningstar columnist John Rekenthaler digs into this new suit, Bell v. Anthem. BenefitsPro, Bloomberg, InvestmentNews, and PlanSponsor also covered the news.

At least part of the issue here revolves around accusations of lack of monitoring of fees, not just what level the fees were. And while collective trusts and separate accounts cost less than mutual funds, they also don't offer the same benefits, like the big public disclosures to the SEC or portability into non-institutional accounts like IRAs. And if Vanguard, with its unique mutually-owned structure, charges less for a separate account than for a mutual fund of the same strategy, it's because it costs Vanguard less to run the separate account. So a counter argument to the suit and to the ideas within is that with mutual funds you pay more and you get more.

It's still early days, as the complaint was just filed on December 29. 401(k) industry insiders and fundsters will be watching with baited breath.

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