Opaque, outdated 401(k) plan disclosures harming investors, advisers

Morningstar: Lack of data on fees, investments makes advice on rollovers costlier and more challenging

Jun 20, 2018 @ 4:36 pm

By Greg Iacurci

Opaque and outdated 401(k) plan disclosures are harming investors and financial advisers trying to gauge whether rolling money out of a workplace retirement plan is in the client's best interest, Morningstar Inc. argues in a new report.

The paper says public disclosures by 401(k) plans are inadequate, largely because of inaccurate, old and limited information on investment and administrative fees. That makes it difficult for even sophisticated savers to put information on fees into context.

"This lack of transparency hamstrings advisers trying to act in their clients' best interests, particularly when they try to serve less-well-off clients," Aron Szapiro, director of policy research at Morningstar, and Lia Mitchell, a data content researcher, wrote in the report.

Financial advisers can't easily compare a 401(k) plan to a rollover option — either an individual retirement account or a new workplace retirement plan — or make recommendations about rebalancing "without detailed plan lineup data," they said.

The extra effort required to do an analysis "greatly increases" the cost of financial advice, and higher-quality filings would "help democratize access" to rollover advice, according to the report, "Retirement Plan Transparency: Opaque Data Hinders Best-Interest Advice."

The Department of Labor fiduciary rule, which became effective in June 2017, sought to eliminate conflicts of interest present when investors are deciding whether to roll their money out of a 401(k) plan. That rule now appears to be on the verge of death, however, as a result of a court ruling in March that vacated the regulation.

The 401(k) disclosures in question are found on Form 5500, an annual federal filing made by businesses sponsoring a retirement plan covered by the Employee Retirement Income Security Act of 1974. The filing includes wide-ranging information on investments and fees, but it hasn't been updated as defined-contribution plans have become the dominant workplace savings plan in the U.S.

For example, small 401(k) plans are not required to disclose their investments, making it impossible to determine the fees a participant would pay; even large plans,, which do disclose their investment options, generally don't offer enough information to identify the investment fees, Morningstar said. Nor do disclosures include information on unregistered investments, such as collective investment trust funds or separately managed accounts.

Beyond the challenges posed for investors and advisers, the "opacity of data" means employers can't easily determine if their 401(k) fees are reasonable or their investment lineups are best in class, and regulators don't have a "full picture" of the retirement system, according to the report.

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