With the wealth management sector readying for sweeping new rules, a study examining investment funds' costs highlights big savings on the table.

A study of 401(k) plans shows that billions of dollars could be saved by switching to lower-cost investments from those already held, highlighting how the impending Department of Labor Fiduciary Rule is likely to upend certain business models. 

RiXtrema, a portfolio “crash-testing” company providing risk management tools and analysis wealth managers, cast its eye over 7,472 retirement plans from the Department of Labor EFAST database. (EFAST is an electronic processing system of data filed to the government.) Based on a “conservative analysis”, the study found that plan participants could save on average 0.44 per cent a year (or 44 basis points) by switching into lower-cost investments that are quantitatively very similar to those they already hold. 

With a 401(k) assets coming in at a total of $2.8 trillion (as of the end of 2014, the latest date for which figures were available for the purpose of this report), there is a potential savings of at least $12.3 billion, RiXtrema said in a report.

The DoL Fiduciary Rule, taking full effect in April this year, has brought in a much-anticipated regime that imposes standards on how brokers charge clients to make sure they put customers’ interests first. The rule is designed, its supporters say, to make financial services in the US more professional and less subject to product “push” from fund providers and other entities. The rule is expected to affect about $3 trillion of client assets in the US (source: Wall Street Journal, Morningstar). With costs more of an issue in such an enviroment, the pressure will be on to move into lower-cost funds. The regulatory process is, industry figures note, encouraging use of exchange traded funds, for example.

Explaining the reasons for its survey, RiXtrema said that 401(k) and other retirement plan participants are “poorly served by plan menus filled with expensive mutual funds that tend to underperform over time due to higher fees and lack of consistent alpha”. 

“Until now, there has been surprisingly little quantitative evidence regarding fee inefficiency in retirement plans and plan waste. The DoL used an average figure of 11.3 basis points as an estimate of waste in 401(k) plans, but that figure, which was not clearly sourced, has been widely criticized,” the report said. It continued: “An independent study indicated that menu restrictions in an average plan led to an additional cost of 78 basis points above a low index fund basket, but that study could be challenged based on the argument that high fee funds held by participants cannot be directly compared to low cost funds due to the unique return and correlation profile.”

“For some time, pressure has been building on plan sponsors to address the issue of fee waste in qualified plans,” RiXtrema president Daniel Satchkov, said. “With the new DoL Fiduciary Rule, this pressure is being applied to the financial advice industry as a whole. We undertook this research because we recognize the need for rigorous quantitative evidence to show how much retirees are overpaying in 401(k) plans,” he continued.

The research used the same algorithms available in the 401kFiduciaryOptimizer, a quantitative diagnostic software for retirement plans. A patent is pending for this algorithm.

RiXtrema was founded in 2010 and calls itself a “portfolio crash-testing company” that helps advisors discuss risk with clients.