The Good and Bad of 401(k) Fee Disclosure

For the past few years, the Department of Labor has wrestled with what kind of fee disclosure requirements to impose on 401(k) plans.  Currently the DOL has several pages of fiduciary rules that, if adhered to, will protect employers and plan administrators from potential liability.  While these rules are voluntary, most companies make certain they adhere to them.  Otherwise, they could be faced with fiduciary lawsuits from employees.

Next year, the Department of Labor will require investment companies to individually itemize the fees they charge, according to the New York Times.  This is not a bad idea.  When it comes to any financial or investment products, many forget that these are good like any others that come with a price.  People are paid to manage funds and it should be clear how much fund management is costing the average 401(k) participant.  For me personally, I am happy just knowing what my after-fees rate of return.  If it is X percent of my assets, fine.  If I feel that it is taking too large a chunk of my capital gain, I will invest in something else.  Fees vary, in particular comparing managed funds to index funds. 

But will itemizing each and every fee be of any greater help to a plan participant?  It depends on whether the person is d

etail-oriented.  Consider a phone bill, for example.  About 25 percent of my local land line bill consists of taxes and fees, which, individually listed, take up nearly a full page of my bill.  I have looked at each fee and determined whether or not I really should be paying it.  But I will really never know because when I call the phone company, they don't know what the fee is for either!  Being that I have more important things to do than an in-depth analysis on my phone bill, I have given up and accepted that this 25 percent worth of taxes and fees is here to stay.  Sure, I could shop around for another phone service at perhaps a lower price, but those taxes and fees will not go away.  So do I care whether they are listed individually or as a lump sum?  Not really.  It's just the cost of having  a land-line phone.

So back to the 401(k) funds.  If each item is individually listed, am I going to care?  Maybe.  I may rail

about the investment fees of a particular fund, or move several lines down the page and wonder what kind of service I am getting for paying an individual service fee.  But in the long run, I am more concerned about the overall total in fees.  If I have to read more than a three-page quarterly statement, I will likely ignore any extra information.

All in all, fee disclosure is necessary.  But will it really benefit people, or will it fall victim to a paperwork-weary society, as is the case with the foot-long phone bill?


Comments (2)

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  1. Pam, I’ve mooted this to you when we spoke in person. I think a problem with 401(k) plans is similar we have to one in health insurance: They are chosen by our employers. If I am stuck in a high-fee plan, I have no choice other than to lobby my HR manager or someone like that to give me more choice. As an employee, I am not free to go outside my employer and put the same amount of money into an IRA as I would if I were self-employed. Employees should be free to abandon their employers’ expensive 401(k) plans and put the same amount in self-directed IRAs. This would not disturb your auto-enrolment policy, because the employee would chose.

  2. Jack Towarnicky says:

    Well, this regulation was delivered with the assertion that the savings to participants will far exceed the cost of compliance; and that, ultimately, there will be even greater benefits to participants through changes in their investment behaviors. The intent is to highlight fees to prompt individuals to consider fees in their investment decision-making and to change their investment allocations. In the preamble of the regulations, it states, in part:

    “… The present value of the benefits over the ten-year period 2012–2021 is expected to be about $14.9 billion, with a low estimate of $7.2 billion and a high estimate of $29.9 billion. The present value of the costs over the same time period is expected to be $2.7 billion, with a low estimate of $2.0 billion and a high estimate of $3.3 billion. Overall, the Department estimates that the final regulation will generate a net present value (or net present benefit) of almost $12.3 billion. Table 1 shows the annualized monetized benefits and cost of the regulations and also provides a summary of the benefits and costs. The Department also expects the regulation to produce substantial additional benefits, in the form of improved investment decisions, but the Department was not able to quantify this effect. …”

    “… The regulation’s disclosure requirements are expected to reduce participants’ time otherwise used for searching for fee and other investment information. The Department expects the regulation to produce substantial additional benefits, in the form of improved investment decisions, but the Department was not able to quantify this effect. …”

    I am trying to organize a survey to confirm the baseline investment allocations and time currently spent in searching for fee information. Then, the goal is to repeat the survey in a year to capture any change in investment allocations, the change in time spent in searching for fee information, and the cost of compliance to plan sponsors.

    In terms of participants and fees, you may want to review the results of a study by Professors Laibson, Choi and Madrian. It is quite eye-opening – in terms of the value of fee disclosure’s impact on investment selection.