There are some philosophical questions that just can’t be answered. “If a tree falls in the forest, would anyone hear it?” “What if you threw a party and no one came?” “If you disclose 401(k) fees to participants and they can’t do anything about it, does disclosure matter?”
The popular media simply loves to write stories about the fees paid by 401(k) plans and their participants. Its only natural they’ve been delighted by the DOL’s Fee Disclosure Rule (408(b)-2) that became effective July first of this year.
Sometimes they go so far as to imply it’s better to pay no fee at all. Of course, we all know why this isn’t in the client’s best interest (and if you don’t know why, then read “What’s a Fair Fee to Pay a Fiduciary").
Beyond all the hubbub concerning the ultimate fee level, a much more intriguing matter confronts us. Once the plan sponsors (and, eventually, the participants) receive this new fee information, what’s to be done with it?
Clearly, 401(k) plan sponsors are in a position to actively address any potential fee issues, but how do they know if an issue even exists? We recently surveyed our 4,000-plus FiduciaryNews.com subscribers on this topic. They told us even though they believed nearly all plan sponsors knew of the new Fee Disclosure Rule, a sizable portion of those plan sponsors would not know how to interpret the data provided.
This lack of clarity comes down to one serious omission on the part of the DOL. The regulator, although it promised, failed to provide a template for service providers. Many of our survey respondents felt the DOL should address this and that any template be limited to one page containing a specific itemization of a specific fee for a specific service and whether those fees are directly or indirectly paid for.
Contrast this “ideal” report with the 15-25 page reports we see now. Making the situation worse, these voluminous tomes often also enclose very long URLs readers must go to in order to find the final answer.
The other thing currently lacking is perspective. How would a plan sponsor know if he’s paying above normal, below normal or right in the middle vs. his peers? Again, the survey respondents suggested the template include a benchmark number. Great idea! Only one problem – no reliable source for benchmark numbers exist.
Unlike mutual funds, which are all required to file standardized data semi-annually and whose data can then be aggregated by companies like Lipper, the annual 5500 filing by 401(k) plans does not contain a consistent reporting format that can be easily aggregated to obtain dependable benchmark numbers.
So, 401(k) plan sponsors and soon their participants will know their 401(k) fees in great detail. Now what?
We realistically cannot expect informed action on the part of plan sponsors unless and until they gain perspective. That means creating a reliable benchmark database that doesn’t rely solely on optional self-reporting.
Allow me to humbly suggest to the DOL the following next steps:
1) Update the form 5500 to include audited fee data, by service provider and identifying whether those fees are paid directly (either through the plan or by the plan sponsor) or indirectly (e.g., through 12b-1 fees, revenue sharing, etc…).
2) Create a one-page template for all service providers to submit to their plan sponsor indicating what fees were paid for what service and whether those fees were paid directly or indirectly.
3) Using the submitted 5500 data, provide an online aggregate benchmark for all to see and use.
There. That was easy!