Posted: December 19, 2012
New retirement plan disclosure rules that don’t go far enough
They give just enough info to confuse everybodyBy Tom Gonnella
With so much to fret about these days, retirement should be the least of any Coloradan’s worries.
On the one hand, things don’t look so bad for our state in terms of retirement security. According to Larkspur Data Resources, more than 1.2 million Coloradoans were enrolled in approximately 13,300 401(k) plans with a total of $38 billion in retirement assets. Over the decade spanning 2001-2010, the likelihood that a wage/salary earner in Colorado participated in an employment-based retirement plan rose by 10 percentage points, according to a study by the Employee Benefit Research Institute.
However, newly mandated Department of Labor fee disclosures for retirement plans do not go far enough in their efficacy, and as a result threaten to halt this momentum. At best, the new DOL rules give participants and plan sponsors a tiny window into costs. At worst, they provide just enough information to thoroughly confuse both participants and employers.
The new disclosure statement requires listing the expense ratios of a plan’s underlying funds, and the amount per $1,000 it costs to be invested in those funds.That’s it.
Nowhere in this statement does it even estimate how much of a participant’s hard-earned deferred income was paid to underlying fund managers. If participants want to figure out how much was paid to the managers with whom they invest, they have a very interesting math problem on their hands.
While ancillary costs such as recordkeeping and administration are disclosed on regular quarterly statements, they are not required to be disclosed alongside underlying investment expenses. There is no way to find the “all-in” cost of an individual’s retirement plan without doing a lot of grunt work and reconciling statements.
If credit card companies can disclose how much interest borrowers will pay if they only make minimum payments, there is no reason that 401(k) administrators cannot be as transparent. With an investment in technology, recordkeepers could alleviate the burden of participants performing these calculations themselves by producing systematic reports encompassing all types of fees.
According to a study by Deloitte and the Investment Company Institute, investment expenses account for 84 percent of a plan’s cost. So basically, the largest cost of your retirement is the least transparent!Meanwhile, according to a February 2011 survey conducted by AARP, 71 percent of 401(k) participants think their plan is free of charge!
Business owners across our state must be cognizant of these costs. Not only do their workers depend on these plans for their own security, but also business owners typically have the largest balances in their plans.
While fees are the main enemy of investment returns, fund managers and plan sponsors have to pay their rent and eat, too. However, would-be retirees and business owners should have a right to know explicitly how much they are paying for the privilege, just like any other service in life they would pay for.
The Department of Labor rules for fee disclosure should go an extra step in requiring the following:
1. Plan sponsors should provide personalized annual statements that give more than just snapshot balances and theoretical fee information. They should be required to keep an average daily balance of their participants’ investments, which will allow for more accurate calculation of investment-related expenses.
2. Investment options of a given plan should be benchmarked to both performance and fees. There is no reason to pay a higher fee for one fund with a similar return profile as a lower-fee fund.
3. Explicit hard-dollar expenses associated with plan administration should be included on an annual statement. Savers should not have to gather this information from two different sources.
4. Sponsors should aggregate all expenses related to each individual’s account — both administrative and investment-related — and provide one simple, overall expense, expressed as both a dollar figure and percentage.
Without these changes, true transparency will never be achieved, and cause savers and business owners more headaches than necessary, not to mention the ramifications financially to their retirement balances.
Tom Gonnella is a leader in the fight to bring greater fee disclosure to the 401(k) market. He is a board member of the Council of Independent 401(k) Plan Recordkeepers. Lincoln Trust is a provider of low cost 401(k) plans and its open architecture 401(k) platform provides retirement plan advisors and plan sponsors with the flexibility to select from over 24,000 mutual funds and 900+ ETFs.