The marketplace was well prepared for the big splash that fee disclosure was to bring to our industry, but it may have been a miss
By Jason K. Chepenik, CFP, AIF, C(k)P
In general, fee disclosure is a good idea, an important component of any investment portfolio. However, in the 401(k) business, the glaring problem with plans is the savings rates, not excessive fees.
The retirement plan marketplace has changed rapidly over the past few years, and the majority of the focus has been on three distinct areas: fiduciary oversight, fee transparency and retirement readiness.
ERISA imposes certain basic duties on plan sponsors and other fiduciaries that are designed to ensure that participants have sufficient information to make informed investment decisions. While 404a-5 imposed a new fiduciary duty on plan sponsors to deliver information detailing the plan fees, in the end, it became overwhelming, complex and likely to be discarded by most plan participants.
It missed the mark because the information was not relevant to plan participants or sponsors. If half of all plan participants have less than $30,000 in their 401(k)s and millions have less than $10,000, fees are not the reason those participants will not have enough money to retire. Rather, the focus should be on saving more money.
Plan sponsors and other fiduciaries have good reason to help plan participants with their retirement readiness. Even though the 404a-5 regulations do not expressly require plan sponsors to educate participants on how they should save and invest for their future retirement needs, these rules do, in fact, require the mandatory disclosures to be written in a manner calculated to be understood by the average plan participant. While there is no direct requirement to ensure participants are financially literate, plan sponsors should view the 404a-5 regulations as including an implied duty to educate the average plan participant. They need to help plan participants understand the mandatory disclosures, as well as how to save and invest through the plan.
Plans’ sponsors should be focused on one primary question: Can the participants subsidize their retirement income needs from our plan? Success in our industry will be determined by the efficacy of the outcomes. Unfortunately, our industry still focuses primarily on investment return, fund fees or active versus passive management. What really matters is the ability to retire comfortably.
If we are to call fee disclosure a success, then let’s use the information to fix another obvious problem: fee equitability. Fee disclosure highlights the fact that nearly every participant has a different fee structure, even though each receives the same basic services.
Most plan costs are based on percentages, or basis points, rather on the absolute dollar amount it costs to deliver the service. For example, every participant receives quarterly statements, has access to the call center and has access to a suite of online tools. Yet the costs are variable depending on how much money a participant has or which investments the participant chooses. While the participants’ level of services are the same, the cost is not. This is an industrywide problem that can be fixed easily.
Total cost of benefits
In addition to fixing the structure of the fees, we should shine a light on total employee benefit spending and the small percentage allocated toward retirement plans. The amount of money budgeted for health and welfare benefits dwarfs the expenditures put toward retirement plans. In general, total cost per participant for recordkeeping and administration is between $75 and $150 per year. Yet the plan sponsor could easily be allocating $500 per month for the same employee for the cost of health insurance. Our industry has been subjected to fair amount of negative press for hidden or excessive fees, while the discussion should be on what is a valuable benefit for a fraction of the cost of other benefits.
Perhaps we missed the entire target and not just the mark. At the end of the day, the point is that too much has been made out of the fee disclosure. The lesson learned is we can do better by having participants focus on putting money into the plan in order to get more money out of it, not on the lowest cost option. The other lessons are for our industry, in using platforms that allow for equitable distribution of fees across the plan’s participants.
Lastly, we should continue to have plan sponsors consider their total cost for employee benefits and fight for a larger allocation toward company retirement plans. We still have the opportunity to make a difference … but let’s have better aim moving forward.
Jason K Chepenik, CFP®, AIF, is the managing partner of Chepenik Financial in Winter Park, Fla. Copyright 2013, ASPPA. Used with permission. Visit asppa.org for more information.