Employees are tossing their retirement plan fee disclosures in the circular file, keeping themselves in the dark on how much their 401(k)s cost.
Ever since Aug. 30, 2012, per the Labor Department, retirement plans have been required to distribute fee disclosure documents to 401(k) participants that depict the costs and services they get from record keepers and fund managers.
Employers, in turn, are also supposed to get disclosures from service providers, including financial advisers, also spelling out the fees and services, as well as whether the service provider is acting as a fiduciary.
According to advisers and recent data from Limra, a research and marketing organization, workers seem to be doing precisely what they would be expected to do with 20-page disclosure documents: Blowing them off.
“The documentation has been absolutely asinine: There's just too much of it,” said George Fraser, managing director and financial consultant at Retirement Benefits Group, which is affiliated with
LPL Financial. “People don't understand it; it's like a credit card disclosure.”
Gerald Wernette, principal and director at Rehmann Retirement Builders, agreed. “I have a very small minority of the audience that is trying to wrap its arms around [the disclosure],” he said. “Even in our own plan — and we're a big firm — with our own fee disclosures, I only heard from one person.”
“When it comes to the participant end of things, the disclosures are a borderline waste of time,” Mr. Wernette added.
Indeed, data from the Limra Secure Retirement Institute shows that nearly 40% of working consumers currently contributing to a retirement plan believe they don't pay any expenses in their 401(k). The organization posed that question to 741 individuals who are contributing to a defined-contribution plan.
Limra also found that only one in three participants spends more than five minutes reading the disclosures, and only 12% were able to estimate just how much they pay in fees.
Though workers fail to pay attention to the fee information coming their way, advisers and plan sponsors are taking notice of the disclosures — and they're using them to shake up providers that offer funds and record keeping services.
“We believe that all of these disclosures are making a positive impact in the marketplace, and that fiduciaries in particular are paying closer attention to fees,” said Michael Trupo, a spokesman for the Labor Department. “Our anecdotal evidence is that fees are coming down because of that.”
In fact, for financial advisers working with employers, the disclosures have been great for business.
“The initial fee disclosure made people prospect plans more aggressively,” said Joe Connell, an adviser with Retirement Plan Partners Inc. “It could've turned off the plan sponsor, but it's also helpful in giving them the opportunity to learn more.”
Plan sponsors get wrapped up in the day-to-day work of running their business, and they have very little time to get up to speed on retirement plan details. The Labor Department's fee disclosure mandates, however, are forcing them to ask questions of their service providers and advisers, and to better understand what they're paying for — and whether the service is worth the expense.
“Plan sponsors are definitely looking for a lower cost in the relationship,” Mr. Connell said. “They value benchmarking and independent sources that can provide them with that information.”
Advisers examining those plan sponsor fee disclosures can also push fund managers and record keepers to the negotiation table and advocate for fees that more accurately reflect the service the clients get.
“Good advisers are regularly looking at [fee disclosures] and asking what's fair,” Mr. Fraser said. “With advisers, the plan sponsors get more bang for their buck. And I can tell you the providers aren't cutting fees just because.”
The fee disclosures also have been helpful in the continual slide in 401(k) fees on the asset management side as managers have broadened their share class offerings to accommodate cheaper institutional shares. For instance, this year, ING U.S. launched its R6 share class, and
Fidelity Investments released its Z share class, which has no revenue sharing. Fidelity also slashed fees on its target date offering, the Fidelity Freedom Index Funds, to 16 basis points, from 19 basis points, undercutting the Vanguard Group Inc.'s target date fund offering by two basis points.
Eventually, those lower investment costs will creep down market.
“It's the right thing to do,” said Thomas Dennis, associate managing director of the Limra Secure Retirement Institute. “R shares have been around for years and are largely acceptable in the larger end of the market, due to larger asset level requirements. But now these plans are moving down market because of demand.”
Nevertheless, advisers note that asset managers aren't cutting fees on their own. If anything, costs are down because 401(k) advisers have been pushing for cheaper offerings.
“Existing providers understand they need to be more competitive,” Mr. Connell said. “We see the more traditional direct providers become more responsive when the client hires a fiduciary adviser: Providers come to the table quickly with a fee reduction.”
