An Unintended Consequence of Fee Disclosure

Currently private employer-sponsored defined contricution plan participants who have changed jobs, or who are no longer employed but not retired, have chosen to leave approximately 15 million account balances with their previous employer(s). In 2009,  more than 1 million retirees were receiving installment payments from an employer sponsored plan, up from 746,000 in 2007 — a 36 percent increase in two years. While for most terminating DC participants the current practice is to roll their defined contribution balances into an IRA when they change jobs or retire, it is also true than many choose to leave them where they were accumulated. This second option is about to become more popular. 

The lowest fees an investor can pay anywhere in the world are those paid by participants in a large U.S. employer-sponsored defined contribution plan.   Because of fee disclosure, it will now be easy to do an “apples to apples” comparison of the fees they would pay in an IRA with those they would pay if they leave their money in an employer-sponsored plan when they terminate employment. Once it is easy to understand that the equivalent investment program in an IRA is several times more expensive than that of their employer plan, considerably fewer terminating large company employees are going to roll over their balances into an IRA.

Large employers appear to be welcoming this decision by their retirees. In 2010, 72.3 percent were making installment payment arrangements available as a retirement distribution option. This is up from 61 percent in 2006. At the same time in 2010, 26.5 percent of large plan participants with an account balance were terminated vested employees. Many large plan sponsors want their retirees to maintain their accumulated assets in their plans when they retire. Fee disclosure will boost this participant decision. Along with it, however, will likely come millions more account balances of terminated vested employees.