For three decades, the retirement industry has fought a losing battle.
Not against regulators.
Not against Congress.
Against competition.
Competition drove investment management fees relentlessly downward.
Vanguard built an empire on low-cost indexing.
Fidelity now indexes roughly one-third of the assets it manages.
BlackRock became the world’s largest asset manager largely through index investing.
Large institutional 401(k) plans increasingly pay between 10 and 30 basis points for broadly diversified index portfolios.
For Wall Street, that is a crisis.
The traditional mutual fund business has become extraordinarily efficient—and extraordinarily unprofitable compared to what came before.
So the industry needed a new business model.
That model is built around products that are difficult to compare, difficult to value, and difficult to benchmark.
The Economics Tell the Story
Consider the economics.
Large index mutual funds:
- 10–30 basis points.
Traditional fixed annuities:
- approximately 200–400 basis points once spreads and embedded compensation are considered.
Traditional private-equity funds:
- approximately 300–600 basis points after management fees, carried interest and other costs, consistent with numerous academic studies, including work by Ludovic Phalippou.
This is not a small pricing difference.
It is an entirely different business.
Every trillion dollars that moves from a 20-basis-point product to a 300-basis-point product represents tens of billions of dollars of additional annual revenue.
That is the economic incentive driving today’s retirement-product innovation.
Mutual Funds Became Too Competitive
SEC-registered mutual funds are remarkably transparent.
Daily pricing.
Portfolio disclosure.
Comparable expense ratios.
Morningstar comparisons.
Independent boards.
Public filings.
Competition works.
When every investment manager owns essentially the same publicly traded securities, fees inevitably fall.
The index revolution proved that.
Wall Street’s answer was not to compete harder.
It was to move into investments that cannot easily be compared.
The New Business Model
The industry’s growth areas now have remarkably similar characteristics.
Private equity.
Private credit.
Insurance products.
Lifetime-income products.
Collective investment trusts.
Insurance separate accounts.
These products often involve multiple legal structures before participants reach the underlying investments.
A target-date collective investment trust may invest in another collective investment trust.
That trust may invest in an insurance-company separate account.
The separate account may invest in private-equity or private-credit funds.
Every additional legal structure creates another layer of administration.
Another layer of valuation.
Another layer of contracts.
Another layer of compensation.
Most importantly, another layer that makes straightforward fee comparisons increasingly difficult.
Why State-Regulated Collective Trusts?
This is where an interesting pattern emerges.
I have yet to identify a current SEC-registered open-end mutual fund that owns traditional annuity contracts.
Likewise, I have not identified a current OCC-supervised ERISA collective investment trust holding the kinds of private-equity partnerships now being promoted for participant-directed target-date funds.
Instead, many of the industry’s newest products appear to be organized through state-chartered trust companies.
Nevada.
Oregon.
Maine.
It raises an obvious question.
If these investments are as straightforward as their sponsors claim, why are they increasingly being introduced through legal structures outside SEC mutual funds and, increasingly, outside direct OCC-supervised collective investment trusts?
Complexity Protects High Fees
High fees are easiest to sustain when comparisons become difficult.
Participants know how to compare an S&P 500 index fund charging 0.03%.
They have a much harder time comparing:
- a target-date collective investment trust;
- investing in another collective investment trust;
- investing in an insurance separate account;
- investing in a portfolio of private-equity partnerships.
At that point, what exactly is the participant comparing?
The benchmark?
The valuation methodology?
The insurance spread?
The carried interest?
The management fee?
The consulting fee?
The recordkeeping fee?
The answer is often: all of them.
Or none of them.
The New Toll Road
Think of the modern retirement system as a highway.
Traditional index investing is a public interstate.
Efficient.
Transparent.
Low cost.
Private markets increasingly resemble a series of toll booths.
Every legal structure can collect a fee.
Every intermediary can justify another charge.
Every additional layer makes it more difficult for participants—and sometimes even fiduciaries—to determine the total cost of reaching the underlying investments.
The investment itself may not have changed very much.
The economics certainly have.
Fiduciaries Should Follow the Money
Investment committees are often told these products are about diversification.
Or access.
Or innovation.
Those claims deserve careful evaluation.
But fiduciaries should begin with a simpler question.
Who benefits economically from moving retirement assets out of 20-basis-point index funds and into products costing several hundred basis points?
Until that question is answered clearly, every additional legal structure should be viewed not simply as an investment vehicle, but as part of the product’s overall economic design.
The retirement industry did not abandon low-cost mutual funds because they stopped working.
It abandoned them because they became too inexpensive.
That is the story behind private equity, private credit and modern annuity products.
It is, above all, a story about fee recapture.
The CommonSense 401k Project 
Well done! Been waiting for this one for some time.👍😎
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