Participant Understanding of Fees Improves Only Slowly

The Department of Labor has enacted a number of initiatives in the last decade to increase retirement plan fee and pricing transparency, but participant awareness of what and how they pay continues to lag.   

Mandatory fee disclosures under 408(b)(2) and 404(a)(5) were put in place to boost transparency and communication regarding retirement plan provider fees, services and potential conflicts of interest.

However experts widely agree that, while the regulations certainly made much more information available to plan participants, relatively few retirement plan investors take full advantage of the increased disclosures. 

“I suspect that some plan participants use the disclosures as best as they can, and probably a lot of participants just throw it away,” says Aron Szapiro, director of policy research at Morningstar. “Or they don’t look at the disclosures until there is some big decision point coming, but then they need a little extra help to contextualize it.”

Jim Sampson, director of retirement advisory services at Hilb Group Retirement Services, believes that fee disclosures have benefited the small group of participants who are drawn to make the effort to understand retirement plan fees, but “this is clearly not every participant.”

“That’s what the plan fee disclosures have done, opened the eyes of people who pay attention,” he says. “Unfortunately, not everybody pays attention.”

Will Hansen, senior vice president of retirement and compensation policy for the ERISA Industry Committee (ERIC), agrees that promoting understanding of fee disclosures is a big challenge right now. He says he believes transparency and awareness “start with genuine engagement between a plan sponsor and participant, especially through financial wellness programs.”

“If you engage an individual at the very basic level of even doing some simple budgeting types of exercises, hopefully you can build off of that foundation and get to the point where you then get a little further into the weeds of explaining to a person what and how they pay for the plan,” Hansen suggests. “In addition, many plan sponsors say they would benefit from more transparency around what other plan sponsor are paying. Anything you can do to sort of contextualize what these fees mean overtime is going to be valuable.”

Although education on fee disclosures is essential, to Sampson, just as important is to ensure participants can understand the overall value of their plan in a simplified manner. Whereas fee disclosures highlight the charges participants pay for each part of the plan, Sampson urges plan sponsors and participants to weigh this information against “the real value associated with the plan.”

“There’s an awful lot of emphasis on fees within 401(k) plans, where, maybe instead there should be a little more emphasis on the value side of the equation,” he says. “What are you getting for those fees?”

Szapiro agrees, and emphasizes the “imperative role plan sponsors play in interpreting fees and value and providing the best options, and keeping the participants’ interest in mind.”