IMHO: No One To Blame

Like most of you, I have found the soaring price of gasoline to be enormously frustrating.

Not that we haven’t dealt with this kind of thing before—but in the past, there generally seemed to be a reasonable explanation, whether it be a deliberate shift by OPEC, refineries shut down by a hurricane, or some kind of political turmoil in some far-off nation. This time, we have a series of potential “culprits’—the new economies in India and China, government taxes, greedy oil companies, irresponsible automobile manufacturers, unresponsive legislators, and, more recently, underinflated tires, and even speculative pension fund investments. It seems like everyone—and no one—is to blame for our current predicament (and, as painful as the current situation is, just wait until winter).

Some politicians have already picked up on the shift—and, with luck, their August recess will help them better understand just how angry the American people are about the situation. I wouldn’t for a minute suggest that our current energy pricing issues can be talked into submission—but it is intriguing how just talking about actually doing something in the short term has already served to bring down oil prices.

Talking Points

There are similar motivations at work in the DoL’s recent fee disclosure proposal (see “IMHO: “Know’ Way” ). Not that speculation has (yet) been accused of driving up 401(k) fees—but the DoL specifically states that the proposal’s required disclosures “…[are] expected to result in the payment of lower fees for many participants.’

I’ll get to how much lower in a minute, but it’s worth considering just exactly how much it may cost us to achieve those savings—in no small part because most of the 103-page document that brought that proposal to light is consumed with outlining the various costs and benefits projected to result from the new rules. Suffice it to say, it’s going to be expensive. In fact, under Executive Order 12866, the DoL has determined that this action is “significant’ because “it is likely to have an effect on the economy of more than $100 million in any one year.’

How much more? The present value of the costs over a 10-year period is projected to be more than $750 million. On the other hand, the present value of the projected benefits is expected to be about $6.9 billion.

The Costs

So far, so good. But only until you begin to explore the assumptions behind those numbers. First, there’s the cost of getting started. Because the DoL says that “plans may employ service providers for making disclosures and that these service providers are likely to spread fixed and start-up costs across many plan clients,’ it applies an hourly legal review rate of $113, and assumes that every participant-directed plan will employ legal services upfront to review the regulation for 30 minutes. That adds up to $24 million, according to the DoL.

The DoL also assumes that each plan will spend 30 minutes of clerical time (at an hourly rate of $26) preparing the disclosures at a cost of $5.7 million. The DoL also assumes that it will take 15 minutes of legal time and 30 minutes of that clerical resource to review and update plan-related information; extrapolates those numbers across 59,000 new start-up plans, as well as 378,000 currently operating ($17.2 million); and assumes that costs associated with additional recordkeeping and of producing actual dollar disclosures will cost $26.5 million in year one, and $9.3 million in subsequent years, based on some 2001 GAO projections. They also incorporate average costs for individual plans to consolidate fee information from various providers (one hour per plan at $60/hour) for another $26 million in 2009 costs, and another $35 million that year to send all these disclosures out to participants (the DoL assumes it will take clerical staff an additional two minutes, and that 38% of disclosures will be sent electronically). Oh—and then there’s the cost of distributing the materials. The DoL assumes that the annual disclosure will be 13 pages for plans not already providing disclosures similar to section 404(c) disclosures, and an extra three pages for those who are. All told (making allowances again for 38% to be made electronically), that adds up to another $8.2 million in 2009. All in all, the DoL projects that their proposal will cost the industry $127 million (and change) in 2009—about $335/plan, if you buy into the DoL assumptions. It gets less expensive each year, but in its least expensive year (2018), it would cost nearly $53 million in today’s dollars, albeit spread across the entire participant-directed plan universe.

The Benefits

While there are certainly assumptions worth questioning on the cost side, the benefit side is where, IMHO, things get really “squishy.’ The DoL starts by attributing $307 million in benefits (over a 10-year period) because participants will actually behave differently, now that they have different and/or easier-to-understand information (and assuming that they do, as the DoL assumes, pay 11 basis points more than they should). I think the former assumption is far too generous in terms of extrapolating participant response. On the other hand, the latter—that, on average, they pay just 11 basis points more than they should—strikes me as conservative.

The DoL also thinks that around 29% of participants (the number an EBRI study says acted on information they received from their retirement plans) will spend time researching their options, and will thus benefit from the increased clarity of the disclosures. How much? Well, EBRI claims these participants spent 19 hours per year, on average, researching retirement—and the DoL thinks that the new disclosures would save 90 minutes/year for non-404c compliant programs, and an hour/year for the rest. That adds up to 19 million hours—and, assuming an hourly rate of $31 (the value of a leisure hour), participants would save about $608 million in 2009.

Now, of course, nobody is writing a check for that savings in time—and whether it will save that many people that much time is still anybody’s guess (the DoL has solicited comments on both). But those “soft’ cost savings of time combined with the savings attributed to changes in behavior wind up, in the DoL’s projections, to provide nearly $7 billion (yes, that’s a “b’) in savings over the 10-year period.

What’s Next?

Personally, I think the projected costs are too conservative, and the projected benefits far too optimistic, based on my experience working with retirement plan participants. That the gap between the two is narrower than projected, however, doesn’t mean there isn’t a gap, and surely shouldn’t suggest that there isn’t a net benefit to be found in the regulations proposed—or in a later, better version.

We may feel stuck between a rock and a hard place when it comes to fuel prices. But the Department of Labor has clearly laid out the basic requirements and, by my reckoning, made at least some attempt to leverage existing mediums and materials to mitigate the effort and expense. Their assumptions may be “wrong,’ but we know what they are, and what they are based on. Their proposed timetable for implementation may be unrealistic, but we have a chance to express those concerns.

And if we don’t take advantage of that opportunity—if we let “others’ take the lead in framing the final result—then, IMHO, we have no one to blame for the results but ourselves.

Editor’s Note: the Employee Benefits Security Administration (EBSA) encourages interested persons to submit their comments electronically by e-mail to (enter into subject line: Participant Fee Disclosure Project) or by using the Federal eRulemaking portal at

Persons submitting comments electronically are encouraged not to submit paper copies. Persons interested in submitting paper copies should send or deliver their comments to the Office of Regulations and Interpretations, Employee Benefits Security Administration, Attn: Participant Fee Disclosure Project, Room N-5655, U.S. Department of Labor, 200 Constitution Avenue, NW., Washington, DC 20210.

All comments will be available to the public, without charge, online at and and at the Public Disclosure Room, N-1513, Employee Benefits Security Administration, U.S. Department of Labor, 200 Constitution Avenue, NW., Washington, DC 20210.