Ignorance Is NOT Bliss: The Sad State of 401(k) Fee Disclosure (And What You Can Do About It)

Generally speaking, the economics of retirement plans is screwed up and has been for years.  Despite the fact that just about every 401(k) provider I now meet claims to have been a long-time proponent of full disclosure, the retirement plan industry has really fallen short of providing clear and easy-to-understand information.  As a result, fees have come under intense scrutiny over the past year and become a major hot-button issue.  This is a good thing because the issue of fees has a major impact on both fiduciaries and participants. 

ERISA section 404(a)(1)(A) is clear that fiduciaries have a duty to ensure that retirement plan fees are reasonable.  In order to make a judgement as to reasonableness, a fiduciary must first identify and understand the fees that are being paid and know who is receiving compensation (and how much) from the plan.  Unfortunately, I haven't seen this happening in most retirement plans, especially at the smaller end of the market (I'd say in plans under $50 million in assets).  Fee disclosure most directly impacts participants who wind up bearing the vast amount of costs associated with a retirement plan.  Participants depend on their fiduciaries to be knowledgeable about fees (and fee arrangements) so as to protect their retirement income.  Without fiduciaries who are vigilant about fee containment, the costs to participants and the impact on their retirement income can easily spiral out of control (see this paper I co-wrote for an illustration). 

As readers of my book know, I include questions that fiduciaries should be asking at the end of each chapter.  In fact, Chapter 6 ("Deciphering Fees & Expenses") is dedicated to this topic.

Solving the problem and getting the answers you and your participants deserve begins with knowing the right questions to ask.  Here's 10 questions to get you started:

  1.  Are we comfortable with level of proactive fee disclosure provided by our service providers?
  2.  Do we clearly understand all the fees associated with our plan, both direct and indirect, who is receiving compensation from the plan, and the amount of that compensation in percentages and dollars?
  3. How do the fees in our plan compare with other plans that are similar in size?
  4. When was the last time we had a detailed fee analysis conducted on our plan by an independent, objective third-party?
  5. Do any of the funds in our plan include any revenue sharing in the form of Sub-TA fees? How much?
  6. Is there any amount of 12b-1 fees included in our funds? How much?
  7. What share class are the funds in our plan? Why were these share classes chosen?
  8. Do we have retail or institutional share classes in the plan? If retail, can we qualify for institutional classes?
  9. Do any funds in the plan provide for higher 12b-1 fees than others and create a conflict for the recommendations by our broker, advisor, or consultant?
  10. In light of the previous question, should we consider eliminating all funds that provide for any indirect compensation?

Welcome to the Fixing the 401(k) Blog!

Welcome to the Fixing the 401(k) Blog. 

This blog is intended to provide you, the reader, with timely and useful information concerning fiduciary responsibility, ERISA, and developments in the rapidly changing 401(k) industry. It is based on my strong belief that our country's retirement system is broken and in critical need of repair and transformation.  The ideas and issues that will be addressed and my commentary are also influenced by my book Fixing the 401(k): What Fiduciaries Must Know (And Do) To Help Employees Retire Successfully.

Systemic issues such as lack of transparency, conflicts of interest, the impact of excessive (and often hidden) fees, ineffective plan design, and unsuccessful investment experiences by participants all contribute to the problem.  Without a doubt, many of these problems can be traced back to the retirement industry.  However, plan fiduciaries are not without fault for having allowed these issues to exist for far too long without requiring greater accountability and for failing to protect the interests of the people they serve.

At the end of the day, plan fiduciaries are the only ones who have the power to bring about the change required to protect the interests of participants (and their beneficiaries) and help them retire successfully and with meaningful benefits. As ERISA attorney Stephen D. Rosenberg suggests in his review of my book:

"Plan participants have neither the power, responsibility nor authority to do so, and outside vendors - particularly ones who do not rise to the level of a fiduciary or who will at least argue that they do not - likewise may lack, at a minimum, the incentives to address these problems. The Wall Street implosion just drives these points home further; fiduciaries alone are in a position to protect plan participants from the pressures and potentially explosive risks in retirement investing by means of company plans such as 401(k)s, and there really isn’t anyone else with the authority, power or interest in doing so."

My goal for this blog is threefold:

  1. To inform you about recent and interesting issues in the retirement plan industry
  2. To provide you with thoughtful commentary about these issues
  3. To empower and equip anyone who is a retirement plan fiduciary with the information, knowledge and best practices they need to improve their fiduciary decision-making process and ultimately, deliver better retirement outcomes for the participants and beneficiaries they serve.

It is my hope that my experience as a professional independent fiduciary and industry observer will allow me to put some of the issues in a useful context and enable readers to increase their expertise and understanding of these areas. I welcome any suggestions on how I can improve the overall effectiveness and usefulness of this blog for readers.  Please feel free to contact me at using the secure email form found here.

Thanks for reading!