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December 7, 2012 10:53 am
Some investors were surprised in August to see for the first time what they pay in 401(k) plan costs – but others moved their lengthy fee statements straight from mailbox to recycling bin.
The defined contribution (DC) industry has been quick to say 401(k) participants pay little attention to the costs they incur.
But read or ignored, confusing or clear, the new US Department of Labor-mandated fee disclosures are benefiting investors through precipitous drops in retirement plan costs, observers say.
The two new DOL rules require retirement plan service providers to divulge detailed fee information to plan sponsors, who in turn help communicate some of that information to 401(k) participants.
Disclosures were required to be provided beginning August 30. Plan sponsors, motivated in part by the legal weight of their fiduciary duties, are paying more heed. By demanding lower-cost share classes with transparent fees, sponsors have helped lower the costs many employees pay for retirement plans.
“[Disclosures] can be six to eight pages, and they can be longer than that ... Providing clear disclosures to participants is challenging no matter what, because it’s complex information and you’re delivering it to a demographic of people that is not very educated about financial matters,” says Mike Alfred, chief executive of financial information firm BrightScope.
“What matters is all of the changes that are happening in the ecosystem, and those are happening every day ... All of those things lead to better outcomes, even if the individual in question didn’t pay attention.”
The effect of the new DOL rules on record keeping fees – the charges incurred for documentation – has been astounding, one consulting firm says.
Plan sponsors who sought new vendors in 2011 saved an average of 40 per cent on record keeping fees, a recent survey by consulting firm NEPC indicates.
The annual median record keeping fee charged to each participant also dropped from $103 in 2011 to $92 this year.
“We’ve done [the survey] for seven years, and we’ve never seen lower fees. We can’t tie it to anything else,” says Christine Loughlin, partner at NEPC.
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Overall, 401(k) plan options look a bit different than they did less than a year ago. Taking into account the higher fees associated with active management, more plans seem to be incorporating low-cost index funds and exchange traded funds. And met with the plan sponsors’ increased knowledge, the mutual fund industry is lowering fees on institutional share classes to stay afloat in a cost-conscious market.
Fidelity, the largest provider of DC mutual funds, began sending fee disclosures to its 16m participants significantly ahead of the DOL’s deadlines.
“Over the summer we did receive a couple of hundred calls. The vast majority of participants were calling in to see if there was any action they needed to take,” spokesman Mike Shamrell says.
“So far everything seems to be going pretty well ... We have not seen any significant changes from plan sponsors in terms of plan design or fund line-up as a result of the fee disclosures.”
Investors either do not care or are satisfied with the disclosures they received, if industry-aggregated data are to be believed. Data from the Plan Sponsor Council of America indicate only 1.4 per cent of participants raised questions after receiving fee disclosures.
Some participants do not grasp fees simply because they are not reading statements, says Joe Gordon, managing partner of Gordon Asset Management. With a bit of hand-holding, however, investors often take an interest, he adds.
One of Mr Gordon’s clients, a Tennessee automotive dealer with 300 employees, spent two days educating participants on plan fees. About 90 per cent fully understood the fees afterwards.
“This is not what most [sponsors] are doing,” Gordon says. “Most [participants] appreciated the transparency and the fact that they will get an annual notice.”
The firm examined the fees and suggested the dealer find investment options with lower costs.
In selecting an institutional share class free of revenue sharing, a cost notorious for its lack of transparency, the dealer cut the plan’s fees by more than half, to 0.8 per cent annually.
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