Dear plan sponsors and plan administrators,
I’d like to take a moment to make a public plea on behalf of all the retirement plan participants out there: Please don’t mess up our 401(k) plans when the fee disclosure rules take effect next year.
There’s a back-story to my request.
New regulations require that employer-sponsored plan participants receive clear information, beginning during the second quarter of 2012, regarding the fees they’re paying and the expenses associated with these retirement vehicles. A few months ago, the Department of Labor issued disclosure rules clarifying how plan sponsors must address fees associated with employer-sponsored retirement plan investments. The rules pertain to 401(k) plans and the federal Thrift Savings Plan, among others.
Disclosure is good
The rules are a fantastic idea, and this high level of fee transparency should be standard in all savings and investing products. Frankly, we should have seen rules like this two decades ago. But it’s better late than never.
With more information, retirement investors can make knowledgeable decisions for themselves. Knowing when and where fees apply should help people move a step closer to creating a personal retirement strategy that will put them on-target to reach retirement goals. Also, with more transparency, maybe we can move away from the inherent distrust Americans seem to have for the financial industry.
Why disclosure is concerning in the short-term
My plea to plan sponsors stems from my concern that we could have a lot of confused investors if the financial industry doesn’t handle the situation properly. And that could cause people to avoid retirement planning. My fear isn’t unfounded—the industry doesn’t have a stellar track record of clearly communicating the information necessary to help plan participants make good decisions.
With all the industry jargon and acronyms used in “educational” materials, it’s little wonder so many people feel like their heads are spinning when it’s time to make a retirement plan decision.
The confusion is evidenced by studies showing many retirement investors are unaware they’re even paying any fees at all. One study from the AARP indicated that as many as 71 percent of Americans are unaware they’re paying fees to maintain their 401(k) plan account, even though 81 percent indicated that it’s important to understand fee information when making decisions about investments.
Presenting fee and expense information to participants without context could lead some to believe these fees are new. If releasing fee information causes more confusion than clarity, I’m afraid it could scare some people away from participating in retirement savings plans.
So, investors, when these fees and expenses become accessible to you through your retirement plan, take note that all retirement accounts have fees. These fees will likely fall into one of three categories: (1) plan administration, (2) investments, and (3) services. As a participant, you should have an expectation that your fees are reasonable, and your employer has an obligation to make sure that’s the case.
Why, you ask, am I making this plea now when plan sponsors aren’t required to release this information until midway into next year? Employers are working with their administrators on communication plans right now. Decisions made today could have an effect on retirement plan participation for years to come.
Retirement plans offered by an employer can be a valuable investment opportunity, opening up avenues to retirement planning that individuals could not access on their own. My hope is that fee disclosure will help individual investors feel better about contributing toward retirement, not backfire and cause a mass exodus.
Plan sponsors, don’t mess this up.
Scott Holsopple is the president and CEO of Smart401k, offering easy-to-use, cost-effective 401(k) advice and solutions for the everyday investor. His advice has been featured on various news outlets, including FOX Business, USA Today and The Wall Street Journal. Keep tabs on Scott on Twitter and Facebook.