Could new disclosure regulations pose risks for DC plan fiduciaries?
Defined Contribution Plan Trustees will soon be required to disclose direct and indirect compensation paid by the plan in their 5500 filings, as well as provide statements to employees regarding the fees and expenses deducted from their investment accounts. The information concerning plan costs will have to be provided by the Plan’s service providers.
It is likely that many Plan fiduciaries will be surprised to learn how much they have been paying their service providers. Because plan participants will soon learn of the costs as well, it would be in the plan sponsor’s best interest to become familiar with plan costs. Those who have a fiduciary duty to the plan participants and beneficiaries should be proactive in dealing with the impending regulations.
According to a recently released survey conducted under the auspices of AARP, 71% of plan participants reported they did not pay any fees, and only 23% reported that they paid fees. The AARP survey can be found at www.aarp.org/work/retirement-planning/info-02-2011/401k-fees-awareness-11.html. We often hear plan participants quoting their 401(k) administrators or trustees saying things like, “We aren’t paying any fees”. While we rarely say it, what comes immediately to mind is, “NOT.”
The lack of understanding of plan expenses goes beyond plan participants. Unfortuntely. trustees and plan administrators are often oblivious to the actual costs being absorbed by the plan and the participants. Potential costs include advisory fees, brokerage fees and commissions, fund internal operating expenses, 12(b)(1) and other “hidden costs”.
We believe high fees detract from performance. In his article last October which dealt with the predictors of fund performance, Russel Kinnel of Morningstar, wrote the following, “If there's anything in the whole world of mutual funds that you can take to the bank, it's that expense ratios help you make a better decision. In every single time period and data point tested, low-cost funds beat high-cost funds”. http://news.morningstar.com/articlenet/article.aspx?id=347327. When the additional layers of administration and custody for 401(k) plans are added to the high-cost funds, there is often a significant drag on long-term performance. Will plans that pay over 2% in expenses be considered reasonable?
Why would plan sponsors be at risk? What if plan participants discover that they have been overpaying fees for sub-par performance, vis-à-vis other similarly situated plans? When confronted by plan participants or their representatives about plan costs, could the plan fiduciary say, “We didn’t know what we were paying in fees”? That would probably not be the best response for one held to the high fiduciary standards of ERISA.
We applaud the push for transparency in the 401(k) marketplace. Without full disclosure, even the most sophisticated plan sponsor may have a difficult time determining what the all-in plan expenses actually are. Since the near demise of defined benefits plans, most plan participants and their families are relying on their 401(k) plans to provide for them in their post-retirement years. Every dollar paid in unnecessary fees could be 1, 2, 3, 4,or more dollars in retirement. Plan sponsors should get ahead of the curve and address plan costs before they become an issue.
Past performance is not a guarantee or a reliable indicator of future results. This article contains the current opinions of the author but not necessarily those of the Third Sigma Investment Advisors LLC. The author’s opinions are subject to change without notice. This article is distributed for informational purposes only. All investments carry risk and may lose value. Forecasts, estimates, and certain information contained herein are based upon proprietary research and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.