401k Fee Disclosure: What 6 Months Tells Us
The wire services were buzzing with 401k fee stories in the months leading up to the implementation date of July 1, 2012. Now that we’ve lived with the DOL’s new 408(b)(2) Fee Disclosure Rule for nearly six months, that buzz has ebbed to barely a hum. Do preliminary indications suggest it was much ado about nothing? Have plan sponsors really saved money as reports imply? And, when it is all said and done, is this really the priority when it comes to employees who have access to 401k plans?
A spokesman for the Department of Labor told FiduciaryNews.com “Our disclosure regulations were only recently made effective and it is too early to evaluate their impact. What is clear, however, is that for many plan sponsors and participants, these disclosures mark the first time that they can actually see what they are paying to invest in a 401k. Earlier this year we did hear anecdotes of some fees being lowered in anticipation of the regulations going into effect.”
Roger Wohlner, CFP®, a nationally recognized thought leader on financial planning and retirement issues and a regular contributing author to USNews.com’s Smarter Investor series, says he’s also heard of some fees being lowered in anticipation of the implementation of the new rule. He recalls news stories from earlier this year where “it seemed like several of the bundled providers actually reduced fees.” On the face of it, many experts expected just such a move from bundled providers as they has more at risk due to fee disclosure.
But are these fee savings real? NEPC, a Cambridge, Massachusetts based investment consulting firm, recently released the results of a survey it conducted among 401k plan sponsors. In it they write, “Interestingly, recordkeeping fees saw a sharper fall (11%) than the overall expense ratio (2%) of which they are often a component. This may be explained, in part, by recordkeepers shifting fees to one part of the business from another; for instance, accepting lower administrative revenues on one side but seeking higher investment management revenues on the other.” This suggests the bundled providers – who, by definition, are the only service providers that can implement the bait-and-switch strategy described in the NEPC study – may not actually be lowering their fees.
To the extent fees have been reduced, it’s probably only larger plans have seen these benefits. Robert Richter, Vice President of SunGard’s Relius says, “There are reports that some large plan sponsors have been able to reduce plan expenses due to fee disclosure. Over time, this may extend to smaller plans, although one must keep in mind that the margin on these plans is also smaller, so significant reductions in expenses are unlikely.”
A survey of financial professionals who work with 401k plans on a regular basis offers mixed reviews on the new rule. “So far, it has been much ado about nothing,” says Paula Hendrickson, Director of Retirement Plan Consulting, First Western Trust. She adds, “There was a lot of anxiety about the way this initiative was rolled out, and at the end of the day; participants are overwhelmed with disclosure notices.”
In this context, Edward A. Marshall, a partner at Arnall Golden Gregory LLP in Atlanta, Georgia, certainly echoes Hendrickson’s sentiment. He says, “the responses plan fiduciaries have received from plan participants have been rather muted. While there may be water-cooler grousing about fees (in plans many participants erroneously thought were ‘free’), we haven’t seen the pitchforks-and-torches revolts that some feared might accompany the disclosures.” Readers might be interested to note that, in speaking with the DOL last year, they specifically noted their concern that too many plan sponsors – not just participants – thought they were receiving their 401k services for free. Evidently, Rule 408(b)(2) has at least been successful in removing this misconception.
Wohlner says just because we’re not hearing anything doesn’t mean it’s not sinking in. “I’ve heard nothing from plan participants and in fact that is the same comment I’ve heard from sponsors regarding participant questions of them,” he say. On the other hand, he continues, that silence “doesn’t mean that nobody is looking at this stuff, but I’m not sure that many folks really understand it.”
And therein lays a commonly expressed problem with the Fee Disclosure Rule. Marko Ungashick, CEO of Two West Capital Advisors in Kansas City, tells FiduciaryNews.com, “Given the title ‘Fee Disclosure Rule,’ plan trustees have been a little frustrated that the notice to participants didn’t capture all the fees to the plan. They were expecting an easy to read, simple document that listed all their fees. Instead, they received five 20-page documents that were very confusing for the participants and trustees.”
The reaction gets worse when the plans get smaller. “404(a)5 participant disclosures have been very disruptive in the small plan market, but not in the way the DOL intended,” says Karen Smith, President of Nova 401k Associates in Houston, Texas. She says “the 404(a)5 regulations created more administrative work for employers, and in the small plan market much of this work was not handled for the small plan sponsor. Small plan sponsors struggled to understand their responsibilities and many just seem worn out.” Still, she points out, “For all of the questions and issues created for plan sponsors, our clients have not reported many questions from participants.”
None of this surprises Daylian M. Cain, an Assistant Professor of Organizational Behavior at the Yale School of Management in New Haven, Connecticut. He’s an expert in the “perverse effects of disclosing conflicts of interest” and is no stranger to readers of FiduciaryNews.com. We spoke to him for this article and he was his naturally common sense self. “No one is arguing against transparency,” he began, “but it is not the panacea some take it to be.” Of course, he does question whether “disclosures buried in fine-print legalize” constitute transparency.
Cain says there are three behavioral impediments to the effectiveness of disclosure. First, “disclosures often do not cause loud alarm bells to go off (even when they are clearly understood)” because “clients assume their advisors will properly navigate the disclosed conflict.” Second, “getting a second opinion takes time, effort, and money. We’d all prefer to believe that everything is OK already. How many of us seek second medical opinions when the doctor tells us something that we want to hear?” Finally, “even when it is something we don’t want to hear, we often ignore information to our peril. For example, not all of us heed the surgeon general’s warnings.”
Cain does offer hope for a solution. “In a study with George Loewenstein and Don Moore (“When sunlight fails to disinfect,” Journal of Consumer Research, 2011), we found evidence suggesting that mere disclosure was often insufficient at encouraging advisees to get a second opinion. There needed to be a near perfect storm of information, where the source of bias was disclosed and an unbiased second opinion was *simultaneously* presented and disclosed as having come from an advisor with no such conflict. Merely knowing that there was unbiased advice ‘out there somewhere’ was not enough to motivate many advisees to feel that they should go through the trouble of seeking it out…”
Which leads us to one of the biggest complaints about fee disclosure. The DOL promised, then failed to deliver, a template which all service providers should follow. When the Rule was first proposed, the DOL did offer such a template. Flawed as it was, at least it could have fit on one (or two) page(s) and contained only relevant information. Failing to require a standardized reporting format has led to the “five 20-page documents” Ungashick mentions above.
Yes, benchmarks were on the originally proposed template, but they contain their own set of unintended consequences. “The concern with benchmarking is that it could result in a race to the lowest cost services (similar to participants opting for the lowest cost fund), cautions Richter. “It’s imperative that plan level benchmarking delve into the details of the services being provided since an ‘apples-to-apples’ comparison is critical when evaluating service provider fees,” he conclude. The DOL in the past has pointed out this same concern and, for this reason, wrote its final Rule specifically to require plan sponsors to obtain the best value, not the lowest price.
We must ask, then, should the Fee Disclosure Rule have been a priority? “Absolutely!” says Wohlner, explaining “For far too long there have been too many plans with lousy, fee-laden investment choices and nobody was aware. This process at least shed light on this and in some cases may spur a sponsor to take action to improve their plan.”
Pat Brault, CPA, CTFA, a Principal and Regional Director of Wipfli Hewins Investment Advisors, LLC in St. Paul Minnesota, agrees with his Midwest colleague. Brault says, “Employees want to see the difference in fees and plan sponsors want to see how their plan compares against similar sized plans.” Ideally, Fee Disclosure can achieve this.
Richter likes the idea, but questions the timing. “It is an important priority,” he says, “but the timing has not been the best. Because of the economic conditions, many businesses are focusing on survival. A focus on fee disclosure just adds to the burden of maintaining a 401k plan at a time when plan sponsors are thinking of reducing or eliminating the plan altogether. However, fee disclosure to plan sponsors is of critical importance because the ERISA duties are based on the plan sponsor monitoring expenses, not plan participants. The disclosure to plan participants, on the other hand, is probably not the right priority. Disclosure was required before these regulations were issued for plans utilizing ERISA Section 404(c). That’s why in most cases, the information being disclosed has not changed dramatically. The focus on the disclosure may distract from the focus of encouraging employees to participate in the plan and/or increase their financial literacy. What seems to be missing from many of the discussions on fee disclosure is that if employees were to save outside of the plan (which they likely don’t do), their fees would likely be even higher. Many of the mainstream articles overlook this point and merely warn participants that they may be paying excessive fees.”
The top priority of saving more has repeatedly come up in discussions with 401k professions. Henrickson says, though fees are important, “Possibly a bigger issue though, is that we need to get people to actually save for retirement and we meet with far too many people who have saved very little.” Richter goes beyond this when he references saving outside the plan. Ungashick makes a very similar case when he says, “The next big thing in the 401k world needs to be educating people on how to be better stewards of money and that the 401k is just one component of that issue.”
Can we – or should we attempt to – assess whether 408(b)2 has met its goals? Marshall advises, “Anyone who believed fee disclosures were going to be read with rapt attention by engaged plan participants may be disappointed. But it may be too early to interpret that lack of careful attention at the participant level as a ‘fail.’ After all, the mere exercise of having to prepare the disclosures mayhave focused plan fiduciaries on an issue that – in reality – received scant attention before the regulations went into effect. And, it has provided the wide dissemination of data that may help fiduciaries and their advisors better assess – through benchmarking – whether what they’re paying their service providers is prudent and reasonable. Over time, we’ll be better able to gauge whether the disclosure regulations will exert sustained downward pressure on service-provider fees.”
Even if Marshall is correct, Henrickson suggests it’s not the savings on fees 401k investors need to focus on. “The fees are important,” she says, “but if there’s no money being saved, it simply doesn’t matter.”
When we think about the intent of the Fee Disclosure Rule and the objective of 401k plans, Cain leaves us with a wonderful concluding statement that offers meaning for both: “Warning is not always the same as protecting.”
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