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Out of Sight?

401(k) Education

This past week the Government Accountability Office released a report on how (little) participants understand fees—but will their solutions help—or hurt—that condition? 

Despite the fact that even their survey suggested that more than half of surveyed participants felt that they understood fees, the headlines—and the impetus behind the inquiry—was clearly that participants don’t understand the fees they pay. And, let’s face it, we have only their word for it that they do (or don’t). 

Part of the issue with this—and most—participant surveys is that we have no way to validate their sense of things against reality. It’s the same failing that applies to measures of retirement confidence—they may be confident, but should they be? Ditto here—participants may think they have a good grasp on fees, but the survey basically takes them at their word—and even then, roughly 4 in 10 are willing to admit they don’t get it. 

A potentially larger concern is how many (41%) don’t think they pay any fees for their 401(k), as well as the 23% who didn’t know. One can rationalize some amount of confusion as to the how much—but it seems to me that there should be some appreciation for the reality that there is no such thing as a “free” lunch. 

But the underlying assumption is that many aren’t, and even if it is a minority perspective, that we should/could do something to close that gap. Indeed those in Congress[i] who initiated the GAO’s review referred to its findings as a “wake up call.” 

The Recommendations

The GAO made five specific recommendations for the Labor Department to consider—four of which I would consider to be completely unlikely to move the needle. They suggested a “consistent term for asset-based investment fees (e.g., gross expense ratio),” a notice regarding the impact of fees, fee benchmarks and ticker information. Yes, ticker information. While this is conjecture, I’m guessing these recommendations are a product of the thorough survey questions they employed to ascertain participant fee knowledge, which seemed to consist primarily of a quiz on reading a mutual fund prospectus. 

This may, indeed, be helpful in determining the fees one pays in a retirement account, but I suspect those willing to undertake that effort have already mastered those skills—and those that haven’t likely won’t be helped by the recommended additions. In fact, it may well prove to be off-putting. Not that it was all about the complexities of mutual fund disclosures—one item that (only) 46% felt was clear—and that more than half (51%) got wrong—was what appeared a fairly straightforward disclosure about participant fees on loan administration from a large 401(k) plan’s annual disclosure.

Apparently I wasn’t the only one to view these suggestions with skepticism. In response, the Labor Department cautioned that additional information, in and of itself, was “not certain to make a measurable difference.”

That said, the one recommendation that might have an impact was that “quarterly fee disclosures for participant-directed individual retirement accounts provide participants the actual cost of asset-based investment fees paid.” However, the Labor Department—demonstrating a sound awareness of the issues in so doing—commented (on the recommendations overall) that it would “pose significant technical and feasibility challenges”—challenges that it cautioned may limit the efficacy of participant fee disclosures, not to mention pulling its attention away from other regulatory initiatives. 

Honestly, there’s no sure way to know how any of these recommendations might “work,” or how much impact they might have, although they seem likely to engender more costs, and likely more cost than benefit. Personally, I think that most plan participants will, as they always have, choose investments based on net returns, not fees specifically. And I think they’re perfectly capable of assessing that return as one net of fees—or should be. 

It’s worth recalling that we’ve long been cautioned that serving the best interests of participants and beneficiaries requires more than just evaluating fees, though it’s certainly an important element. Ultimately most participants may lack the time or inclination to figure out the costs of their 401(k)—some may lack the ability, and yes—some may even lack the information—or have difficulty discerning its impact. 

That’s why the involved, ongoing oversight of ERISA plan fiduciaries and their advisors is so important—because whatever participants know, or choose to know about, the fees they pay, plan fiduciaries have a duty to know what these fees are—and to ensure that they, and the services rendered for them, are reasonable and in the best interests of those participants. 

Because from a plan participant’s view they may be out of “sight”—but when it comes to plan fiduciaries, they should never be out of mind.

[i] Rep. Bobby Scott (D-VA), who chairs the House Education and Labor Committee, and Sen. Patty Murray (D-WA), who chairs the Senate Health, Education, Labor and Pensions (HELP) Committee.


All comments
Mike Sladky
2 years 3 weeks ago
It should also be noted that the GAO survey revealed that 10% of those surveyed believed a monster lives under their beds-just kidding.