IMHO: “Thinking” Caps

If anything, the intensity has heightened in recent weeks, as we near the Form 5500 filing deadline for December plan-year ends, even as we anxiously await the new 408(b)(2) fee disclosure regulations from the Labor Department—regulations that might well have been at some odds with legislation proposed by Congressman George Miller (D-California) that rode through the House as part of that extenders bill before being dropped by the Senate. 

The urgency behind these initiatives is two-fold: to force those who provide services to these plans to more fully and accurately disclose their fees to plan fiduciaries, and to provide participants with some idea of the monies that are being netted from their investment returns (and taken from their accounts).  Ultimately, it is about helping people make better, or at least more informed, decisions about their retirement plan investments—and these initiatives are all predicated on the notion that these fees are not adequately disclosed, or sufficiently understood, at present. 

That said, a report recently issued by the Transamerica Center for Retirement Studies (from its 11^th Annual Retirement Survey) paints a somewhat different picture (see 401(k) Participants not as Knowledgeable as Employers Think). 

Asked whether they would like to receive more information from their retirement plan provider about fees and expenses associated with their plan, two thirds of the roughly 600 employers surveyed (and these were not limited to clients of Transamerica) said no, and half of those strongly disagreed with that proposition (smaller firms were somewhat more likely to disagree strongly).  Now, that’s a startling statement in view of the characterization of the current state of 401(k) fees by many in Congress and most in the media—not to mention a few in the industry itself. 

Asked if those in their firm who were responsible for overseeing the retirement program had a “clear understanding of the fees and expenses associated with the retirement plan,” nearly all—94%—at least somewhat agreed with that proposition.  Nearly three-quarters of those at (277) larger firms strongly agreed with that statement, as did nearly half of the smaller firms (271).  Could it be that these employers weren’t interested in receiving additional disclosures because they felt they already understood? 

Moreover, strong majorities of employers felt that their workers had a similarly clear understanding of the fees associated with their account; one in five strongly agreed with that statement, while roughly half were willing to say they “somewhat agreed” with the proposition.  Those results, of course, stood in some contrast with workers, where only about a quarter were willing to say they were aware of fees that may be charged to their account (admittedly, nearly as many weren’t sure, while about half said they were not aware). 

These are the kinds of results that tend to work legislators, consultants/advisers—and journalists—into a lather.  The “common wisdom” is, of course, that retirement plans are being gouged; that retirement plan sponsors are complacent, if not complicit in the theft; and that plan participants are oblivious to it all. 

We may draw some comfort from the reality that most retirement plan fees are drawn from the expense ratios applied to the various funds, ratios that are generally disclosed, if somewhat imperfectly, to plan fiduciaries and participants alike (we may not yet know the apportionment, but the gross amount is certainly ascertainable).  And yet, most advisers would likely view the Transamerica Center results with scepticism, if not downright cynicism.  I can hear many of you saying to yourself right now, “They may THINK they know what they’re paying, but they really don’t.” 

That said, don’t YOUR clients know what they are paying?   

It’s hard to know exactly what inferences to draw from the research. Perhaps the plan sponsors are being misled or maybe misinformed; perhaps they do have a workable, if imprecise, idea of the plan costs.  Improbable as this might seem, they might even happen to be a uniquely well-informed segment of plan sponsors.  We may know what they are thinking, but we do not know what they think they are paying, much less how realistic that assessment. 

Regardless, more disclosure is surely coming and—whether they think they know and don’t, or think they do and are correct in that assumption—IMHO, it’s hard to imagine that those disclosures won’t be a positive contribution to the exercise of their fiduciary responsibilities.   

Here’s hoping it keeps us all thinking, rather than leaving us all guessing.