Depending on to whom you talk, the new rules requiring 401(k) fee disclosure will be either a watershed moment for the financial services ind-ustry or a non-event.
After more than four years of deliberation, public comments and delays, the Labor Department's disclosure rule is finally set to take effect July 1. But the 70 million plan participants won't see the results until they receive their 401(k) statements for the third quarter in late fall.
For many participants — and even some plan sponsors — seeing the laundry list of investment management, administrative and advisory fees, and prices may come as a shock. Last year, an AARP survey showed that more than 70% of plan participants think that they don't pay any fees for their company retirement plan.
The question is: What will they do with this new information? And how will financial advisers respond to the questions that will be triggered?
“I believe this is a good thing,” said Michael Eisenberg, a certified public ac-countant and fee-only adviser at Eisenberg Financial Advisors.
“People will finally understand that there is no free lunch,” said Mr. Eisenberg, whose clients are generally individuals with in-vestible assets be-tween $500,000 and $3 million. “Somebody is getting paid to provide these services.”
Michael Falcon, head of retirement services for J.P. Morgan Asset Management, thinks that a small percentage of plan participants may read and respond to the fee disclosures, perhaps questioning what some may consider to be excessive costs.
But he thinks that the majority of participants, already inundated with plan information, are likely to ignore the added disclosure — much the way that many Americans seem to disregard nutritional labeling in an era of epidemic obesity.
Fee disclosure can be meaningless without context, Mr. Falcon said.
“I can have a large account balance without much trading activity in a plan that has a low-fee structure, and the proportional dollar amount of what I'm paying as part of the 401(k) plan will be very high,” Mr. Falcon said.
“Conversely, if I have a low account balance, even in a plan with a high expense ratio, the fees may not look like much,” he said.
Labor Secretary Hilda Solis said that she hopes that when plan sponsors and plan participants get better information on fees and expenses, they will be able to shop around and make informed decisions that will lead to cost savings and a larger nest egg at retirement for workers.
Mr. Falcon worries that it might have the opposite effect, and that some workers will use the newly disclosed fees as yet another excuse not to save for retirement.
PRIVATE ACCOUNTS
Other advisers, such as Mark Cortazzo of Macro Consulting Group LLC in Parsippany, N.J., think that the new awareness about 401(k) fees could spill over into private accounts, causing clients to question the fees that they are paying for managed accounts outside of their company retirement plan. (In the interests of transparency, I must disclose that he is my financial adviser.)
“In today's low-interest-rate, low-expected-return environment, costs become even more important,” Mr. Cortazzo said, noting that lower costs improve investment returns and can allow investors to retire sooner — or reduce the chances of running out of money.
For example, assume that two in-vestors each start with an account valued at $250,000 and want to accumulate $1 million before retiring. The only difference is the advisory fee.
The first investor pays $199 per month (which just happens to be the same amount that Mr. Cortazzo's Flat Fee Portfolio investment management service charges), while the second investor pays a 1.5% fee billed quarterly.
Assuming a 7.74% compounding annual rate of return, the first investor will reach the goal of $1 million and be able to retire after 20 years. The second investor will not be able to retire for 23 years and three months.
By simply reducing advisory fees, the first investor is able to retire more than three years earlier than the second investor.
Paul Sippil, a CPA and registered investment adviser in Chicago, thinks that the new disclosure rules could cast a harsh light on commission-based advisers who have been able to offer “free” retirement planning services in exchange for revenue-sharing agreements.
But Mr. Sippil, who has mounted a one-man campaign against the industry standard of asset-based fees in retirement plans, doubts that the new disclosure rules will cut costs for participants.
“I believe these cumbersome new rules will serve only as an additional barrier to new providers in a marketplace that is dominated by a small number of large players,” he said, noting that the free educational lunches and promotional materials that they offer strongly influence some retirement plan advisers' recommendations.
Mary Beth Franklin (mbfranklin@ investmentnews.com) welcomes your comments and suggestions for column topics. She will discuss strategies for claiming Social Security benefits at the InvestmentNews
Retirement Income Summit in Chicago April 30-May 1.
