That quote, used repeatedly by my late Uncle John for crossroads both small and large, is an inside joke among my family members, but during a discussion with Kevin Watt, senior vice president of Security Benefit’s defined contribution group, it seemed to me like an appropriate opening for recently received fee disclosures.
“We are concerned about a race to the bottom with fee disclosures,” Watt said. He noted that Security Benefit is in favor of letting everyone know what they are paying for, but it is worried the immediate reaction of plan sponsors and participants will be focused on cost rather than value.
Plan sponsors should look at the value of what they are paying for, and whether they are getting services from providers and advisers that are reasonably priced. If plan sponsors decide to change providers based on only low-cost, they will harm millions of Americans, according to Watt.
Tom Kmak, CEO of Fiduciary Benchmark, agrees. He said the firm has seen many cases where plans with low fees also had participant success measures that were below average. He noted that the Department of Labor (DOL) regulation clearly requires plan fiduciaries to look beyond low fees to items like services and fiduciary status to determine fee “reasonableness.” In fact, the final 408(b)(2) regulations mentioned the word reasonable or reasonableness nearly 50 times. “Looking at fees without looking at value is a meaningless exercise,” Kmak stated.
Watt said Security Benefit is concerned that if plan sponsors rush to slash fees, the first cut will be the advisers to their plans. He warned that would be the wrong reaction because, unless they want to do the research themselves, advisers can help plan sponsors with the fee benchmarking and help decide what value the plan sponsor is receiving from providers, and whether fees are reasonable.
Also, now is the time when participants need help more than ever. There is value to having someone educate participants and help the plan reach its savings strategy, he added.
When I received my own disclosures, I have to admit I thought it would be confusing for those not in the industry (most participants), and I noticed that the information that stuck out the most was the expense ratios of investments, listed in a chart on the very right hand column. Watt said this should lead to discussions, not a gut reaction. The fear is that participants will decide to simply move to the cheapest investments, but most of the cheapest are not well-diversified or generate lower long-term rates of return.
“The mathematics clearly show that for most participants, it is better to save more than have lower fees when it comes to generating retirement income,” Kmak pointed out.
Follow-up after participant fee disclosures is a good idea, perhaps even a necessity. The more information plan sponsors can provide participants that they can understand, the more comfortable they will be with retirement plan decisions, Watt contended. Having employee meetings soon would be a good idea.
Watt also believes a website and some calculators will not do the trick; participants need more to make good savings and investing decisions. An adviser can help them with decisions and show them the benefit they are getting for their fees.
That is why Security Benefit wanted to sound an alarm. Fee disclosures are a good thing, but the reaction should be a discussion around value. Racing to the lowest cost services and potentially leaving employees on their own is an unwise decision, Watt concluded.