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Top Ten Reasons Why 401k Participant Fee Disclosure Hurts Employees’ Retirement Prospects

April 14
00:03 2015

(This is the second in a series of three articles.)

It came with such fanfare. When the DOL announced it would mandate fee disclosure, many cheered. They figured it would end the common misconception that their retirement plan was free. Still, while fee disclosure made immediate Apollo_17_Launch_NASA_public_domainsense for plan sponsors – after all, they are the only ones who could actually do anything about it – the fact fees would also be disclosed to participants wasn’t widely questioned. “I am not sure that arming the participant with more information can be a bad thing,” says Jonathan Baltes, CEO of QPSteno in Fort Wayne, Indiana. “Some may argue that too much information causes analysis paralysis. But I don’t think that is true in this case. Unlike the investment allocations that require a decision, there is no decision to be made here. So there shouldn’t be any paralysis. In fact, all the participant can do is ask more questions. I feel like we are going to start seeing more participants with pointed questions as news of these large suits and settlements starts to attract mainstream attention.”

In retrospect, though, after seeing the perhaps unanticipated side effects of 401k participant fee disclosure, professionals sharing Baltes view are increasingly having their doubts. In the spirit of the famous late night countdown, we present the Top Ten Reasons Why 401k Participant Fee Disclosure Hurts Employee’s Retirement Prospects:

#10: It encourages emotional decision making, a.k.a., the “I never paid fees before. Why should I pay fees now?” myth – How many professionals have heard this sentiment from plan participants (and even a few plan sponsors)? Yes, disclosing fees ends the false premise that “my 401k is free,” but there’s a flipside to that. “Awareness is a double edge sword,” says John J. Graney, President of Premier Fiduciary Services in Edwardsville, Illinois. “Even though fees have been paid all along by plan participants, if they believe they have not been paying fees and now you disclose to them, ‘here are your plan fees…’ it creates confusion, anger, frustration and so on. You may see participants stop saving for retirement out of emotion. Any financial decision made on emotion is usually wrong.” Of course, the only thing worse than this knee-jerk reaction is…

#9: It gives the appearance of the fees have the 401k equivalent of the “Good Housekeeping Seal of Approval” – Once plan participants get over the idea that, in fact, their 401k plan is not free, then a form of psychic numbing may occur. In case you’re not familiar with the term, psychic numbing happens when someone is shocked by an event, then remains forever numb to the recurrence of that same event. In a similar way, fee disclosure, meant to cause plan participants to raise issues with questionable fees, merely provides an unintended rubber stamp of approval to those questionable fees. Tim Wood, Retirement Plan Consultant at Deschutes Investment Consulting located in Portland, Oregon, says, “The ‘governing authority’ of a regulatory process and an ‘official’ document can provide an unearned imprimatur on the quality and the reasonableness of their provider relationships.” There is an alternative to this naïve trust and it’s this…

#8: Disclosure is either ignored or misunderstood – Thanks to the lack of a uniform template and uniform disclosure language, plan participant fee disclosure is not intuitive. It currently can require too much work on the part of the plan participant to master its true meaning. As a result, the risk is plan participants simply skip reading them. Think of 401k plan participant fee disclosure as the equivalent of the universally ignored mutual fund prospectus in terms of effectiveness. “Disclosure without education is either ignored or misunderstood by all involved,” says Murray Carter, Executive VP – Wealth Management of CSG Capital Partners of Janney Montgomery Scott in Washington, DC. If this leads to employee cynicism, we find ourselves here…

#7: It can discourage saving – What’s the best way to avoid paying these fees? For some 401k plan participants, the answer to that question is simply to no participate in the plan. “The negative to too much participant disclosure is to create reasons where the participant doesn’t use the benefit,” says Carter. “Many participants are cynical regarding their company provided benefits and if they see costs associated with participating may choose not to save at all. This would be a result that we all want to avoid otherwise we will be furthering our retirement crisis.” This problem, in turn, leads us to…

#6: It can cause the employee to forgo free money – If you don’t contribute to your company 401k plan, you don’t get the company match. That’s free money you’re missing on. Wood says, “Fully participating in that plan is more advantageous to an employee than not participating at all, even if the plan is overly expensive and/or the investments are not optimal.” A willingness to play the game can, unfortunately, cause this…

#5: It encourages the fallacy of “cheaper is better” leading to worse service – For those 401k plan participants who get over the fact their plan pays fees and continue to contribute, the emphasis of fees caused by fee disclosure can incorrectly imply lower costs are better than higher costs. “When evaluating expenses, it is important to keep in mind that reasonable does not mean the cheapest,” says Paula Friedman, Managing Director, at encore401k located in McLean, Virginia. “Participants may not understand the services provided to the plan or how the associated fees compare without proper education.”

If this “cheaper is better” mantra takes hold of the retirement plan industry (which this DOL specifically has warned against), the risk is service providers will comply by removing services in order to cut fees. Jonathan Broadbent, Founder & CEO of Plan Partners in Lyndhurst, Ohio, says, “In light of decades of very poor or nonexistent services to workplace retirement plans, there is a fear that there is a ‘race to the bottom’ relative to fees.”

This brings us to…

#4: Fees are not reported with any context – Viewed alone, it’s often difficult for the average person to distinguish between the colors of teal, turquoise and aqua. When viewed together, in the context of one another, it’s a lot easier to understand which color is which. Unfortunately, 401k plan participant fee disclosure, when it isn’t hidden in pages of mumbo jumbo text, usually amounts to a single number and a short text. What’s it all mean? To the typical 401k plan participant, about as much as the super hyperfine wave function of quantum mechanics. “If the plan has excessively high fees, or there’s no statement of value, then the employee doesn’t understand what the purpose of the fees are, and in turn, questions why they should have to pay them,” says Jim Sampson, Managing Principal of Cornerstone Retirement Advisors in Warwick, Rhode Island. “Couple that with no option to do anything about it and you’ve got a disgruntled employee, which leads to unnecessary audits and additional plan costs.” Once we trigger this reaction in employees, we find…

#3: It takes the 401k plan participant’s eye off the ball – It’s a slippery slope, taking fees out of context, that might take the employee down a path not in his best interests. (Do you understand where “fiduciary duty” fits into this equation now?) Jerry Kalish, President, National Benefit Services, Inc. in Chicago, Illinois, sees mandated 401k plan participant fee disclosure as “potentially” damaging “for at least three reasons: 1) focusing on fees without considering fund performance; 2) not considering other important investment principles such as dollar cost averaging and asset allocation; and, 3) not realizing the most important factor in accumulating adequate income at retirement is the rate of contributions to the plan.” But, let’s be honest, we can’t place the burden of this problem solely on the heels of the 401k plan participant. We would be remiss not to point out…

#2: If plan sponsors don’t understand 401k fees, how can we expect plan participants to understand 401k fees? – How can we expect the employees to properly interpret the true meaning of their retirement plan’s fees if their company’s fiduciaries don’t know how to do it? “In working with small employers it doesn’t surprise me that the DOL’s 401k fee disclosure isn’t working,” says Kent Klingshirn, Principal at Klingshirn Investment Advisors, LLC located in Medina, Ohio. “I find that the Plan Sponsor doesn’t really understand the fee structure and therefore doesn’t educate the participants.” If plan sponsors were fully aware, then they’d quickly realize, the number one reason why 401k plan participant fee disclosure hurts employee’s retirement prospects is…

#1: It emphasizes the wrong thing – We learned last time plan participant fee disclosure can frustrate employees because, in the end, employees cannot do anything about fees, only plan sponsors can. Stu Caplan, Director of Portfolio Management at Apex Financial Advisors in Yardley, Pennsylvania says plan participant fee disclosure “could essentially create more second guessing over small amounts of fees (percentage wise) than what it’s worth.”

They can’t control them, so why must the DOL rub fees in the face of employees? Why doesn’t the DOL instead require participant statements to include data on the one factor employees can control and the one thing that matters most to retirement readiness: the employee savings rate. “Some participants can be penny wise, but pound foolish,” says Jason Woon, Founder of Main Street 401k, L3C based in the San Francisco/Bay Area. He says, “Low plan and investment fees cannot make up for a lack of savings or poor asset allocation.”

For all these potentially harmful side effects, we must accept that 401k plan participant fee disclosure will remain with us for some time. There’s only one way to combat the downside of fee disclosure, and that’s through education. “Disclosure and education are needed, so is an explanation of all the benefits of the plan,” says Carter. “In short, plans need to take more care in making sure the Plan Sponsor, Investment Committee and Participants are better educated. It is my belief that often this is where the problem is.”

Previous: Why Isn’t 401k Fee Disclosure Working?
Next: How to Improve 401k Participant Fee Disclosure

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.

About Author

Christopher Carosa, CTFA

Christopher Carosa, CTFA


  1. Carl Johnson
    Carl Johnson April 14, 12:50

    And for most of the same reasons participants should not be permitted to direct the investment of their “retirement” accounts. However, since 401(k) plan accounts aren’t necessarily retirement accounts, but only deferred pay accounts, I see no problem with allowing participants to direct their investments and I think fee disclosure is a good idea. If participants aren’t bright enough to know how to use fee information, then they’re not bright enough to be allowed to direct the investment of their accounts (in a tax-subsidized plan).

  2. Mark Zoril
    Mark Zoril April 15, 12:12

    #8, #4, and #2 are significant problems and speak to the overall ignorance of all types of consumers has it relates to investment and investment services fees. Price and value are challenges in many industries and certainly in the financial services as well. Recently, in speaking with a CEO of hospital with $7 Million in their plan, when I asked their fee structure and how they paid for the cost of the plan and investments, she confessed she didn’t know. Some fiduciaries are aware of fees, but my guess is that it is probably around 80 to 90% of fiduciaries for small and mid-sized plans have almost no idea what their total costs are.

  3. Henry GrosJean
    Henry GrosJean July 08, 11:50

    Seriously, if your client is not aware that there are fees involved within their 401(k) they shouldn’t have one.

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