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A Focus on Fees – Seven Years Later

10/21/2019
By Jack Towarnicky

Few read mandated fee disclosures; the disclosures may mislead more than they inform.

In 2012, I analyzed the EBSA’s fee disclosure regulations. Here’s part of the abstract from my paper:

"Over the next ten years, let’s increase the fees paid by individual account plans, like the 401(k), by hundreds of millions of dollars per year to deliver newly mandated fee and investment information that no participant specifically asked for, few will read, even fewer will understand, and still fewer will correctly apply in their investment decision-making. Practical experience and careful evaluation of the proposed regulation cost benefit analysis suggests that perhaps, at most, 10% of participants will save an average of $3.79 per year in time spent researching fee information, generating $27,330,069 of net savings to be spread over seven million or so participants. However, the other 90% of participants will experience no identifiable savings (they do not spend any time researching fees today), but will incur annual per capita costs estimated as $11.10 (as most fees are ultimately paid by participants). That’s $712,037,889 per year in increased costs spread over seventy million or so participants!"

In addition to layering on more fees paid by participants, my other top criticism was that, “The regulations warn about the impact of fees … but fail to suggest, let alone require the plan sponsor to focus any attention whatsoever on the main reason for the differences in fees among plans – by failing to require disclosure of a comparable “all-in” fee for plans of comparable size and composition, and using comparable services.”

I was reminded of my concerns about the fee disclosures twice today – I stumbled across:

  • A blog post by Michael Webb of Cammack Retirement. Interestingly, he1:
    o Noted that reading his nine-page disclosure was better than “a trip to the dentist;”
    o Failed to mention whether the benchmark indices offered any value;
    o Praised fee disclosures expressed as dollars per $1,000 of assets, however; he
    o Didn’t confirm whether the statement showed the actual dollar amount of fees charged to his account. 
  • The State Street advertisement, below from the Wall Street Journal, Pages R6 & R7, October 7, 2019 Print Edition 

Seven years later, my 2012 conclusions about fee disclosures remain unchanged:

  • Few participants read these disclosures, even though participants shoulder most costs; 
  • Fewer understand the disclosures, which may distract participants from focusing on investment results; 
  • Still fewer will take action based on the fee disclosures; and 
  • Only a small minority will correctly apply fee disclosure information in allocating assets among the available plan investments. 

The EBSA’s regulations state that individual account retirement savings plan participants would see a net benefit in the form of a savings of time. OK, prove it. By now, we should have adequate data to confirm actual results – who paid, how much, who benefitted, etc. In fact, before issuing any more mandated disclosures, let’s have the agencies confirm the accuracy of their estimates regarding regulations affecting benefit plans, if only because costs are generally paid by plan participants (directly or indirectly).2

As a plan sponsor, what has your experience been regarding fee disclosures? Send me a note at: jtowarnicky@usaretirement.org


1M. A. Webb, What I Learned from Reading My Retirement Plan Fee Disclosure, 9/26/19, Accessed 10/7/19 at: https://cammackretirement.com/knowledge-center/topofmind/what-i-learned-from-reading-my-retirement-plan-fee-disclosure
2Such activities would be consistent with various legislation and executive orders, such as: the Paperwork Reduction Act of 1980 (Pub. L. 96-511), the Small Business Paperwork Relief Act of 2002, (Pub. L. 107-198), and Executive Orders:

  • 12866, September 30, 1993 (Regulatory Planning and Review), 
  • 13563, Section 6, January 18, 2011 (Improving Regulation and Regulatory Review), 
  • 13771, January 30, 2017 (Reducing Regulation and Controlling Regulatory Costs), and 
  • 13777, February 24, 2017, Enforcing the Regulatory Reform Agenda.
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