How to Improve 401k Participant Fee Disclosure
(This is the third and final installment in a series of three articles.)
Like an ornery in-law who’s overstayed his welcome, 401k participant fee disclosure isn’t going away anytime soon. It’s become the booby prize for those who believe sunlight heals all, a veritable case study for all that is wrong with disclosure. Worse, it shows how outdated (and perhaps a bit naïve) DOL thinking has become. Tim Wood, Retirement Plan Consultant at Deschutes Investment Consulting located in Portland, Oregon, says, “The current regulatory regime allows for formulas that require a calculator and fee disclosure documents in excess of 15 or 20 pages, with more reserved for endnotes. By design, in the hope that the average person will not pay any attention, this is completely inconsistent in an age where millions communicate in 140 characters or less.”
On top of utilizing 20th century regulatory templates, the DOL fails to see the practical dissonance between its own language and the language of the folks it wishes to protect. Charles Miller of Financial Services Communications Consulting in the greater Chicago area, says the “DOL stuff is written by lawyers for lawyers, not for participants, regardless of the ERISA regs. The DOL still does not understand that disclosure and communication are two very different things. It’s the same with SPDs…. written by lawyers to protect sponsors, not inform participants. I once read ‘equitable estoppel’ is an SPD. Who do they suppose is reading it?”
The legalese leads to the volumes of pages Wood refers to when a much simpler approach could more easily produce the desired results. “The DOL should eliminate upfront disclosure and required a one page year-end itemized fee summary that highlights the actual cost of the plan in dollars and cents (not in basis points or rates),” says Jason Woon, Founder of Main Street 401k, L3C based in the San Francisco/Bay Area.
In addition to single page disclosure, the DOL has within its power the ability to require disclosure be consistent among all service providers. “Probably the easiest way to clean this up is for uniform disclosure reports,” says John J. Graney, President of Premier Fiduciary Services in Edwardsville, Illinois. “We gather the information for our clients and then provide a report that provides a uniform comparison of all provider fees to the plan sponsors for their fee benchmarking analyses. If we can do it, the DOL can certainly create a template that all providers must use when quoting their fees.”
But this template need not apply just to service providers. It can be extended to the plan sponsors themselves. The SEC requires “plain English” fee disclosure tables on all mutual fund prospectuses. Similarly, 401k plans might benefit from identical requirements. Paul Ruedi, CEO of Ruedi Wealth Management, Inc. in Champaign, Illinois says the DOL should force “plans to use a simple (consistent) table.”
Leading plan administrators have already taken it upon themselves to do this – and seen great results. Mark Zoril, Founder of PlanVision located in Plymouth, Minnesota, uses just such a one-page disclosure document. He says, “The advantages of the one pager is that it is a tool that I can use to convey, in a relatively simple way, what the bulk of plan costs are to the plan participants. The response, from my perspective, has been wonderful!! What is the most exciting part of all of this, though, is the employee reaction – without a doubt. We want them to be better informed and I know that this is helping them better understand their fees and think about what it means to become a better consumer and protect their interests.”
The hidden beauty of a one-page disclosure is that it makes it easier to ensure employees get it and look at it (even if it’s just a quick glance). Simple techniques can be added to encourage employees do more than just glance at it. “Put fees in bold on the signature page for participants,” says Stu Caplan, Director of Portfolio Management at Apex Financial Advisors in Yardley, Pennsylvania.
Again, in bringing fee disclosure into the 21st century, we need to go beyond paper and into the virtual world of the web, tablets, and other mobile devices. Paula Friedman, Managing Director, at encore401k located in McLean, Virginia, says, “The disclosures should be incorporated into the plan website since this is where most participants go to learn more about their options and manage their accounts. This could be included as part of the enrollment process or as a standalone fee summary report. For example, if the website showed a fee estimate specific to that participant at the end of the enrollment process, as well as the breakdown of which provider is receiving each portion of the fee, it would make it easier for the participant to understand and evaluate the total cost of their plan.”
But fee disclosure in isolation of all else is about as useful as reporting only an airplane’s speed to a pilot. Some sense of direction is also necessary. “When it comes to fee disclosure, it seems that many participants (and plan sponsors for that matter) are like a lost hiker,” says Jonathan Baltes, CEO of QPSteno in Fort Wayne, Indiana. “The best thing for someone who is lost is an external point of reference. So I would say a good improvement would be including some benchmarking information with the participant disclosures. Once you understand where you are relative to the landscape, you can start to figure out where to go.”
Perhaps the threats to plan sponsors for failing to disclose may also be misplaced, or at least might not be the only incentive used by the DOL to guarantee compliance. Wood says, “Offer a carrot rather swinging a club. Provide incentives for employers to independently benchmark their plan every two to three years (the fee disclosure rules really imply this anyway). Provide some significant regulatory safe harbors to plan sponsors that do so. If a cost is involved in benchmarking that is not absorbed by the plan, offer a full tax credit for all costs involved.”
When will the DOL finally hear this message? One can only begin to guess. In the meantime, it probably makes good sense from the standpoint of one’s fiduciary duty for 401k plan sponsors to seriously consider how their plan fees are disclosed to employees. This includes not only some of the ideas presented here, but perhaps the insertion of some additional data that measures an employee’s retirement readiness (or “financial wellness” to use the term de jour) with perhaps some tips to improve those numbers.
Interested in learning more about this and other important topics confronting 401k fiduciaries? Explore Mr. Carosa’s book 401(k) Fiduciary Solutions and discover how to solve those hidden traps that often pop up in 401k plans.
Mr. Carosa is available for keynote speaking engagements, especially in venues located in the Northeast, MidAtantic and Midwestern regions of the United States and in the Toronto region of Canada. His new book Hey! What’s My Number? – How to Increase the Odds You Will Retire in Comfort is available from your favorite bookstore.