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Why Isn’t 401k Fee Disclosure Working?

April 07
03:18 2015

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

It’s been more than two years now since the DOL required 401k plan fees to be disclosed in participant statements. Yet, at least one study says one in five employees still think they get their 401k for free. “No, we do not think the 191344_6700_GE_Reveal_Lightbulb_stock_xchng_royalty_free_300DOL’s Fee Disclosure is working and certainly not working as it should,” says John J. Graney, President of Premier Fiduciary Services in Edwardsville, Illinois.

Fee Disclosure isn’t working as well as hoped? How could this be? Wasn’t disclosure sold as the ultimate cure-all to all our 401k woes? Perhaps we placed too much emphasis on disclosure alone. “While my colleagues and I have long cast doubt on the effectiveness of disclosure, none of us are against disclosure. Informing the public is surely part of the solution,” says Daylian M. Cain, associate professor of Management & Marketing at Yale. Yet he reminds us “disclosure is not the panacea it is cracked up to be. Information can sometimes lose potency against deeply-held beliefs. As we have seen in the domain of product-warning labels, sometimes the question is not whether people were given information, it is whether those people then became informed.”

What went wrong with 401k fee disclosure? To find the answer to this question, scanned the country for those closest to the dilemma. Here’s what we found:

“The single biggest reason for fee disclosure not working is the same as most other 401k problems: apathy,” says Murray Carter, Executive VP – Wealth Management of CSG Capital Partners of Janney Montgomery Scott in Washington, DC. “Most participants barely take the time to look at their statements long enough to see what their balance is. It is a shame that participants will spend hours deciding the best TV to purchase, while spending as little time possible understanding their retirement options, costs etc.”

Beyond apathy, though, is the lack of user-friendliness when it comes to the disclosure documents. “The average employer disclosure is over 10 pages long, so many employers are simply not reviewing this information,” says Jason Woon, Founder of Main Street 401k, L3C based in the San Francisco/Bay Area.

Information overload and clever hide-and-seek tactics on the part of service providers can often befuddle the casual employee. Paula Friedman, Managing Director, at encore401k located in McLean, Virginia, says “there are two primary reasons why the fee disclosures are not working: First, the disclosures are distributed along with other plan related notices and tend to get ‘lost in the shuffle.’ Many participants do not read them (or the other plan notices) due to lack of interest, the use of lingo, and their length/format. Second, many of the fees for the plan are paid to service providers in the form of revenue sharing. These payments are included in the investment expense ratio and are not broken out as a transaction on the participant statement. Since the participant fee disclosure document does not provide a breakdown as to which portion of the investment costs are being paid to plan service providers, it seems as though they are paid to the fund manager. If a participant doesn’t see a deduction against their balance, they will most likely think there is no charge for these services.”

Even if the plan participant is brave enough to dive into those many pages, they may not be properly equipped to discern the true meaning of all those numbers. Paul Ruedi, CEO of Ruedi Wealth Management, Inc. in Champaign, Illinois says, “Most people cannot handle simple fractions. Showing costs in dollars per $1,000 invested, it still has little impact. Yes, a lower cost per $1000 invested probably makes sense (I would like to hope that is the conclusion), but it still lacks meaning.”

Aside from the math, the English might read foreign to many. “It’s simple to see why the current fee disclosure isn’t working: The disclosures are too long, too wordy and too difficult to interpret,” says Jim Sampson, Managing Principal of Cornerstone Retirement Advisors in Warwick, Rhode Island.

Jerry Kalish, President, National Benefit Services, Inc. in Chicago, Illinois, agrees. He says, “That this Regulation relates to fiduciary matters and personal potential personal liability has meant that the communication is being driven by the attorneys – and hence difficult to comprehend – sometimes even for those of us with 401k experience from the very beginning in the early 1980s.”

Finally, the very culture of the 401k may be working against full understanding. “Fee disclosure could be seen as ineffective for several reasons,” says Jonathan Baltes, CEO of QPSteno in Fort Wayne, Indiana.” One could be a culmination of learned helplessness on the part of the participant. The 401k industry takes great care to push automatic features. They push automatic enrollment, QDIAs, automatic escalation, etc. While there may be definite benefits to using inertia to benefit the savings behavior of the participant, it could also inadvertently be disengaging the individual.”

Paved with Good Intentions
Few question the DOL’s motives in establishing 401k fee disclosure. “The intentions were good in that they wanted to expose egregious fees and for the most part this probably worked by way of getting 401k providers to self-police and minimize fees to a reasonable level,” says Stu Caplan, Director of Portfolio Management at Apex Financial Advisors in Yardley, Pennsylvania.

It’s clear the DOL had certain industry practices squarely in its sites. “The DOL largely wanted to eliminate or drastically reduce industry revenue sharing, embedded fees and conflicts of interests,” says Woon.

In the end, though, the DOL may have been stymied by its unrealistic faith in the general level of financial literacy. “The idea was paved with good intentions,” says Ruedi, “they (the DOL) just did not realize most folks are not good enough at basic math to have the impact they hoped for.”

There exist, however, quite a few cynics who suspect the credibility of those “good intentions.” Tim Wood, Retirement Plan Consultant at Deschutes Investment Consulting located in Portland, Oregon, says, “I tend to have a pessimistic view of government regulations, preferring free market solutions. Free enterprise gave us the smart phone, an elegant solution to a challenge few people even knew they had. The public sector gave us the long lines and uninspired service at the DMV. In the final analysis, the regulators and those being regulated each got exactly what they wanted. On one hand, more employees to do the regulating; on the other hand, an unreadable document which largely protects the status quo.”

Overall, though most share the sentiments of Sampson, who says, “The DOL clearly had good intentions of creating awareness around fees, and hoped it would lead to more educated consumers being able to reduce excess costs for their employees. They get an A for effort, but a F, if not an incomplete, for execution.”

What Can Employees Realistically Do?
For all this fee disclosure, even if it is read and understood, employees have little recourse. It’s not like they can move to a different plan. Carter says, “There isn’t much participants can do about the fees except ask questions. ‘Are these fees reasonable for this plan?’ ‘When was the last time the fees were reviewed?’ Etc. Sometimes it takes questions to prompt action.”

“The reality is little for them to do other than raise enough concern that the company goes out for a market review,” says Woon. “If a 401k plan has not checked the market in 2-3 years, they are likely significantly paying more than necessary. Generally, an employee must remind the business owner or senior management that they have the most to gain since they are often the participants with the largest account balances.”

Since plan fees are spread evenly (or should be) among all investment options – the only area where employees have a choice, the knowledge of plan fees is essentially non-actionable. Kalish says plan participants can’t do “much since most 401k plans offer a set menu of funds selected by someone other than the participants.”

“As optimistic as I like to be, I don’t see much that one participant can do to affect change if they don’t like what they see,” says Baltes. “Taking it to the DOL doesn’t work. I have had multiple encounters with them. In some cases, they have been blasé about fiduciary breaches. They seem to think that simply taking the issue to a plan sponsor will result in a swift resolution without repercussions for the participant. And we all know that the plan sponsor shouldn’t retaliate against the participant, but we also know that it happens. The best thing a participant can do is to get other participants involved. A group of employees is going to have more impact on decision makers than a lone squeaky wheel.”

“This is part of the problem,” says Sampson. “Employees don’t really have a say or the opportunity to do much about the costs associated with their plan. They might be able to engage their employer in a healthy conversation about it, but the reality is that an employee rarely will stick their neck out enough to make a real difference.”

While most employees might be powerless to do anything about fees, some are in a position to address the issue. “For the average working pawn at a large corporation, there’s not much that can be done beyond complaining to HR,” says Caplan. “However, those in decision making positions can demand lower fees or request proposals from other sources.”

The Buck Stops Here
And therein “lies the rub,” as a certain Bard might desire to say. Those in a position to do something about plan fees should have already done that something. “It is ultimately up to the employer to review the plan fees and ensure they are reasonable,” says Friedman.

Sampson puts is more completely when he says, “Fee disclosure efforts should really be geared towards the plan sponsors who: 1) should be more in tune with the issues at hand; 2) have an adviser who can translate it for them; and, 3) are in a position to make changes where necessary. If the sponsor makes a good faith effort to reduce costs where possible (i.e. without giving up benefit and/or value), then the trickle down will be that participants benefit from those changes.”

So it’s not really participant level fee disclosure that is actionable, but plan sponsor level fee disclosure. “The fee disclosure is much more relevant to the plan sponsor as they should be looking at the plan as fiduciaries,” says Carter. “They should have more knowledge of available choices and even better access to education and training from their adviser, recordkeeper and/or TPA.”

It leaves one asking the question as to why this has taken so long. After all, this has always been the duty of the plan sponsor. “For the plan sponsor it is a fiduciary requirement and fee disclosure/transparency makes one of their fiduciary requirements a little easier,” Says Graney.

If there’s a problem of financial literacy on the employee end of the equation, then there may be a problem of fiduciary literacy on the employer’s end. “Most plan sponsors still do not understand the responsibility and fiduciary standard that they are held to,” says Woon. “They are personally liable for their actions or inaction on the company’s 401k plan. The vast majority of class actions and settlements today are about excessive fee and fiduciary breaches of duty. If I was a business owner today, I would take a few easy steps to eliminate these risks by outsourcing the investment management to an ERISA 3(38) advisor, purchase fiduciary liability insurance, and/or benchmark the plan and fees to the current marketplace.”

Caplan sums up why fee disclosure is more critical to plan sponsors: “To cover themselves from litigation.”

A Warning To Plan Sponsors
Ruedi puts it in more plain terms: “If they like their money and net worth, the plan sponsors will make changes immediately. The issue is not going unnoticed by the legal community.”

We’ve already seen the consequences of failing to heed the rigors of due diligence. “The plan sponsor has an obligation to act in the best interests of plan participants and their beneficiaries and ensure that the plan expenses are reasonable for the services provided,” says Friedman. “Failure to review the expenses could result in a breach of the plan sponsor’s fiduciary duties.”

Echoing Caplan, Baltes says, “Fee disclosure is more relevant to a plan sponsor than a participant for one simple reason: liability. As a fiduciary, a plan sponsor can be held personally liable for the operation of the plan.”

Who Needs Fee Disclosure When You Have Jerry Schlichter?
Ironically, long before the DOL mandated fee disclosure, the seeds of fee awareness were sown in courtrooms across the country. “Incentives modify behavior and come as carrots and sticks. In this case the sticks are lawsuits, and they seem to be working. Sponsors have become more fee sensitive,” says Ronald J. Surz, president and owner of Target Date Solutions in San Clemente, California.

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

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. Mark Zoril
    Mark Zoril April 07, 11:47

    Nice, relevant piece with interesting comments from many service providers. In our experience, plan participants do not read their statements (for the most part) and do not read the fee disclosures as well. They just don’t. There is apathy and certainly many people are intimidated by the math/numbers (like how to understand average returns vs cumulative returns, etc…). And understanding fees relative to value is important for anyone to be a good consumer. We think low costs are critically important, but if a plan or sponsor can justify higher fees for plan services that is their decision.

    I would also suggest that many plan sponsors, particularly those with smaller and mid-sized employers, are just as ignorant of plan fees as many of the rank and file. One of the issues about this in general is that it does not have an immediate impact on people. Having less money in the future because of excessive fees doesn’t necessarily change your life right now. So, many people just ignore the problem or choose to do nothing about it.

    However, I believe many service providers (record keepers, advisory firms, investment firms, etc..) throughout the industry have done a spectacular job of burying their fees/costs deep into their conversations with their clients. I am skeptical that many address this in a straightforward manner. (The argument against raising this issue with clients is why do it if the consumer is not demanding it, which is a fair point). Fees and how they are paid by consumers, while they may appear intimidating, are not that complicated and can be presented in a way that even the most uninformed employee can understand.

    With our clients, who we enroll one on one, we use a one page fee sheet to explain the plan fees, who gets paid what, and how fees can impact growth. We diligently explain the costs and encourage investors to better understand how fees are charged in the financial services industry so they can better assess value. This conversation typically takes just 3 to 4 minutes. We then have each participant indicate on a brief enrollment assessment that they understand the fees. They receive a copy of this assessment verifying their understanding and so does the employer. This documentation is done electronically.

    Practitioners need to take responsibility for this. Especially those that are working directly with the employees. Don’t let the fee conversation come to you or wait for employees to ask or plan sponsors to demand meaningful information on fees. If you charge a fair amount for your services, or are even “expensive,” so be it. Any provider should be able to justify their charges and value over the course of time and maintain a healthy relationship with well-informed clients.

  2. Christopher Carosa, CTFA
    Christopher Carosa, CTFA Author April 07, 12:04


    Well said. Be sure to read the rest of this series. You may find even more interesting tidbits.

  3. Mark Zoril
    Mark Zoril April 07, 12:27

    Looking forward to it!

  4. Jim Watkins
    Jim Watkins April 07, 18:10

    Another excellent article. The law’s failure to provide a simple disclosure template for making the required fee disclosures essentially guaranteed the failure of the law to achieve the desired results. IMHO, the perceived apathy on the part of employees is fear of retaliAtion/loss of job for voicing concerns and lack of meaningful educational programs.

  5. Dave Arey
    Dave Arey April 07, 21:07

    Chris, I’m looking forward to the rest of this series. In the meantime, you quote Paul Ruedi who said about fess disclosure, “they (DOL) just did not realize most folks are not good enough at basic math to have the impact they hoped for” to which I say, “Amen.”

    Mark Zoril commented “With our clients, who we enroll one on one, we use a one page fact sheet to explain the plan fees, who gets paid what, and how fees can impact growth.”

    Finally, you quote Murray Carter: “The fee disclosure is much more relevant to the plan sponsor as they should be looking at the plan as fiduciaries,” says Carter. “They should have more knowledge of available choices and even better access to education and training from their adviser, recordkeeper and/or TPA.”

    Three observations:

    1. I would be very interest to see what Mark’s one page fact sheet looks like.

    2. It seems to me that to really understand “how fees can impact growth” one needs to understand compound growth (which is a bit beyond basic math). Of course, it would be possible to show the results of compound growth in dollars accumulated over time based on say $5,000 a year being invested over 20, 30, and 40 years. I’ve not seen any plan provider, advisers, or administrators ever supply that information to participants.

    3. It is not the case that plan sponsors SHOULD be looking at the plan as fiduciaries, and that they SHOULD have more knowledge…they have a legal obligation to do so.

    The “market” solution to 401(k) fees is easy to identify, as Chris has done…Jerry Schlichter.

  6. Christopher Carosa, CTFA
    Christopher Carosa, CTFA Author April 07, 21:25

    Dave, nice thoughts. Thanks. And, while I can’t promise Mark’s one pager, you might be interested in the third installment. Stay tuned.

  7. Dennis Myhre, AIC
    Dennis Myhre, AIC April 15, 10:30

    Chris, if your readers will indulge me, I would like to make a comparision of the 401(k) industry to the automotive industry… both sell products the public wants for security and comfort, both have service providers, and both are regulated.

    Consider what the safety record of the automotive industry would be today if all Michigan automotive manufacturers were regulated by Michigan lawmakers, and NHTSA held the dealers responsible for safety concerns. Insurance companies are regulated by the states, and the DOL holds the employers (Plan Sponsors) responsible for the industry’s fiduciary breaches. Just as Ralph Nader was a consumer protectionist, your readers are the “Ralph Naders” of the Fiduciary Standard.

    Disclosure requirements today are simply a license to steal by the insurance industry, an industry that offers equity shares of non-traded products to consumers that under state regulations are legally considered class 2 investors. Definitely a losing proposition for the investor.

    As a Fiduciary Advisor, I would first identify the state of domicile for the insurance company the client is using for a service provider. I would then print the State Code that regulates the provider ( for example, Iowa Code 508a) and ask the client to read the code. For most states, the language is similar. I would then ask him to read the group annuity that governs the plan, since he likely has never read the document. When the Plan Sponsor realizes that his service provider owns the plan assets and that those assets may be invested without any restrictions that typically apply to investments and without recourse by his employees; that he, the employer, is responsible for the misdeeds of the insurance company, he/she would probably reconsider their options.

    I am not a Fiduciary Advisor, but I do believe in due diligence, a phrase most 401(k) investors have never heard of. Your readers know that the 401(k) program is the keystone for the financial survival of our future, and thanks to state and federal mis-regulation, the archway is collapsing over our heads. We need change at the legislative level, and we need a consumer advocacy plan to make the system work.

    Dennis Myhre, AIC

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