IMHO: The Sum of Its Parts

Last week, the House Committee on Education and Labor passed the 401(k) Fair Disclosure for Retirement Security Act (H.R. 3185).
That it passed was no surprise (it did so along party lines, and it is, after all, a bill sponsored by the chairman of that committee, Congressman George Miller (D-California)).
The issue that seems to loom largest in the minds of those paying attention is the requirement that all service providers break down their charges into four specific categories: administrative fees, investment management fees, transaction fees, and other fees. This isn’t a big deal for many, perhaps most—and it’s a lot simpler than the first version of the bill. Still, a number of bundled providers are claiming that it will be a burden for them to determine what that breakdown is, that the process of discovering—and communicating—those figures will cost money, and, at some point, that it doesn’t make sense because those services aren’t available from them at an à la carte pricing.
A stronger case can perhaps be made that these disclosures will amount to naught; that participants won’t read or understand them—or have any frame of reference. Plan sponsors are concerned that the disclosure will simply generate more participant concern and/or confusion, and potentially provide some with an excuse to defer or forego participating in the plan, and I think there are merits in all these concerns. Still, it seems unlikely that the Miller bill will go anywhere, certainly not in the short-term (it’s an election year, after all)—and the Department of Labor is well into the process of setting out its own proposals on enhanced fee disclosures.
Adults Education
But I think—and I’ve said this before—that it’s time we started treating participants like adults. We need to tell them the truth about retirement expenses, we need to be blunt about the realities of their current savings patterns, and they need to understand that these services we work so hard to provide have a cost. And, IMHO, the advent and widespread embrace of “automatic’ plan features makes that honesty more critical than ever.
In that spirit, and regardless of what we wind up with on the regulatory or legislative front—or when—I think it’s time we insist on the following:
  • Every plan sponsor should receive—today—a detail of the fees paid by their plan—and, IMHO, the breakdown articulated in the Miller bill is a good framework. Bundled providers can surely provide estimates, if nothing else. You can’t fulfill your fiduciary duty to ensure that fees and services are reasonable if you don’t know what the fees for those services are.
  • Every plan sponsor should receive some idea of the fees paid by participants in their plan. You don’t have to see the Miller bill as inevitable to know the day is coming when we’re going to HAVE to tell participants what they are paying in a more explicit way. Worst case—take the detail above and divide it by the number of participants; or take the total plan fees, divide it by the total plan market value, and multiply it by the individual account balances. You might be surprised how close that will get you (certainly if the fees are largely asset-based).
Now, assuming that their plan adviser has—or will take —a leadership role in attaining those two results, I think it’s time to give plan sponsors and, eventually, plan participants one more thing: something with which to compare that result. Other, comparable 401(k) plans would be good—but why limit it? Why not compare it with the account fees, transaction charges, and retail share-class charges participants would pay if they truly did it on their own?
Many have been worried that participants would be put off by knowing how much these programs really cost—some in Congress clearly think participants are getting ripped off. It may be naïve, but I still think most are getting a real bargain—they just don’t know how good they have it.